Welcome to the second part of our interview with Akhil Patel, editor of Cycles, Trends and Forecasts. You can read part one here.
Akhil recently made a controversial prediction. He believes the stockmarket could hit 15,000 here in Britain – double where it is today.
That’s what we set out to discover in our talk…
Q: When did you decide you wanted to study economic cycles?
A: That goes all the way back to my school years. My school was interested in a lot of philosophy and ancient stuff. One thing they were really quite keen on was an American economist called Henry George. One day, in the assembly, we read “The Unbounded Savannah” [from George’s book Progress and Poverty], which describes the setting of frontiers in the US, explains how economies develop. I remember being fascinated by it.
During the 2000s, when I was doing a master’s in finance, I went back to Henry George’s Progress and Poverty. That book has led to whole movements across the Western world, in China and in Russia to reform the fiscal system – to replace taxation with a charge on the value of land. George argued that that would solve boom-and-bust cycles and address rising inequality, which he said was inherent in our economic system. As we’re seeing, it quite clearly is.
I revisited that in the 2000s. When the financial crisis started to bite in late 2007 and early 2008, I was quite surprised. No one was really talking about it as some kind of repeat of what went on in the early 1990s. To me, they were linked: property prices falling, banks going out of business, people losing their jobs.
The early 1990s were a very formative experience in my life, and I was quite sensitive to that. I decided to investigate based on my reading of Henry George. I came across people who studied economic cycles. I studied them independently for a number of years.
I decided I’d really like to help people prepare and potentially avoid issues that my family faced in the 1990s. That came up again in 2009, when the bank pulled a loan from my father’s company. [My father and his partners] were already talking about a potential merger with another company, but that forced the merger to happen in a way that was not a marriage of equals.
Q: So your family was bitten twice?
A: Yes, as so many families right across the world. I thought: there’s an opportunity here to produce research and advice, write about it in a way that would help both on the downside – for people to protect themselves – but also on the upside, to arrange their affairs and build wealth.
Q: How did that square with your job at the EBRD?
A: By a happy coincidence, I was on a series of short-term contracts when I first joined. As with all organisations, there were budgetary issues. The boss said, “I’d really like to keep you on, but I don’t have the budget.” I said I was looking for part-time work. So it was a coincidental opportunity.
I enjoy the work that EBRD does and the role that I have as principal policy advisor.
Q: Were you never tempted to join a big company or a big investment bank?
A: I thought about it. Until I started working on my economic cycle stuff, I never really seriously considered it. Now, I would possibly consider it only if it helped me understand how things work better.
I think I would work for a hedge fund. The research and work that I do is much more directly applicable. That would be something that I would actively consider if the opportunity became available and it seemed the right fit.
Q: How would you describe your economic beliefs? Are you a libertarian? Are you economically conservative?
A: I would say that I’m a social free-marketeer. I believe very strongly in the operation of the free market, but I don’t believe that under current arrangements, you can let the market operate freely. The social consequences are quite negative under that system. I also don’t think redistributing everything is a solution either.
Economically I follow people like the classical economists: Adam Smith, David Ricardo, Henry George, who had solutions to these issues but were passionate believers in the free market.
Q: Because you think capitalism has cruelties that are not being confronted?
A: Absolutely. And it comes down to David Ricardo: the law of economic rent – the surplus that arises as economies develop. If that were captured publicly, it would fund government and services that every growing society needs. At the same time, you would untax people’s wages and the profits that companies make. You would get a growing economy, full employment – this is the argument – and consistent incentives between labour and capital.
Right now, rents are privately captured. So you have to tax labour and capital, which reduces economic activity. The gains of economic development accrue to the people who own the rent.
Neo-classical economics has deleted this sort of understanding from the mainstream. These solutions are not even within the normal paradigm.
Q: When you refer to rent, do you mean land rent?
A: It arises in a number of places, but principally land rent.
Q: The land rent would go to the government which would then stop taxing people and corporations?
A: Exactly. The land rent arises because government puts in place infrastructure and amenities and the population grows. We see a very clear example. The government has done studies to show the impact of the £30 billion Crossrail project. Property prices have increased very sharply.
Take another example: property along Southwark Street, on the Southbank. When the Jubilee Line extension opened in the late 1990s, it was calculated that around each station on the line, the increase in property value was in the order of £4 billion. All of that value was created by putting in the line. The public paid for it almost twice – through infrastructure and by moving into an area where prices of land had gone up.
Q: What would George have said?
A: You take the incremental value as a public service charge. You’re getting the value of better transport links. You pay an annual charge, but you would at the same time remove taxes on wages, and on what he called capital – on businesses deploying capital to produce more things. You do that across the economy, not just on Southwark Street.
It’s been done in places historically, but landowners don’t like it. They like to capture the unearned gains.
Q: When did you set up your business?
A: in 2013. I was still working at the EBRD. That covered my financial needs more or less, though taking a hit to income was not great. It gave me time to explore issues, read, think, talk to people, do presentations, network. It was a slow burner until last year, when I started writing for Southbank Investment Research.
Q: Your recent note, “The Age of Opportunity”, is an incredibly bullish expose of the world we’re living in and of market conditions. Behind the market bullishness we’re seeing right now is one very extraneous and unusual factor: the election of Donald Trump and all the promises he’s made. How can you draw cyclical conclusions on the basis of what is not a normal situation?
A: I suggest you separate Trump the goon from Trump the politician making promises about infrastructure spending and rolling back bank regulations. That kind of policy platform is extremely common in each cycle. Bank regulations are put in the end of the previous crash to prevent the next one from happening. Banks and politicians conspire to roll them back. It’s a political opportunity for someone who comes along later. If you go back, every cycle, that is exactly what happens.
Infrastructure spending is always a vote winner. Markets are pricing in that something will get done. Obama was keen on a major infrastructure rollout, but he was opposed vehemently by Congress.
Q: You say we are living through the biggest wealth-building period in human history. That’s a major statement.
A: It is, but I think the evidence is there. What’s the size of the middle class in India? 400 million. China has one billion or two billion consumers that weren’t around ten, 20 or 30 years ago, that had the aspiration and the means to enjoy lifestyles in the way we’re accustomed to. This is an enormous opportunity for companies, businesses, people.
Even now, when people talk about slow growth, an economy the size of India is added to world GDP every year. It will be an economy the size of Germany soon, and an economy the size of Japan.
Q: So in your view, India is the new frontier.
A: Absolutely. India in terms of GDP per capita is way behind China, but has so many people who are very aspirational, speak English, are educated, young and driven. India was always held back by its political system, corruption, poverty. These issues aren’t going to go away overnight or in ten or 20 years. There seems to be a real drive for reform at state levels, but also nationally, which is going to have an impact. Already growth is robust and strong.
Q: Aren’t you exaggerating India’s potential?
A: The numbers are there in terms of growth rates. I’ve historically been very negative on India. I always thought it underperformed its potential, given the relationship with the West and a massive diaspora. Some of the biggest companies in the world are now Indian. A lot of things are working.
Q: What about the other BRICs countries? It seems that the whole optimism and hope around these economies is a little passé.
A: That’s true in the case of Brazil and Russia, which are very much commodity-based economies. There was a massive run in commodities from 2001 to 2011, and commodity-based economies did very well in those years.
There’s a bear market in commodities. Another of the cycles that I look at is the Kondratieff wave. We are very much on the upside of a Kondratieff wave. That doesn’t mean commodities will go up for 30 years in a row, but the long-time trend for commodities is up, including in the US.
Q: This incredible golden age of prosperity in the 21st century will be driven by what, exactly?
A: Principally by technological innovations across a range of dimensions: from driverless cars to artificial intelligence to robotics to biotech to additive manufacturing and quantum computing. It’s really incredible.
Q: And you see India as being the engine of world growth?
A: One of them. There’s also the United States – an incredibly innovative country, with a huge technological and innovative culture. China is going to be a major participant.
Other regions will participate fully, but maybe not be the primary driver. There seems to be so much negativity in Europe, some of which I think is quite misplaced. Silicon Valley has made a head start and Europe is not up to speed. But as it gets into more industrial areas, European companies will be at the forefront. There are significant industrial strengths. Germany, France, Italy, the Netherlands, etc, will come into their own. The UK in certain areas such as biotech is world-leading.
Q: What about political tremors such as Brexit?
A: I suppose we ought not to underestimate the potential for politics to throw a spanner into the works. I don’t think there’s something inherent in the UK leaving the EU that will stop any of these developments. It may cause relatively short-term turbulence, but things will settle. I certainly don’t see them interrupting the property or commodities cycle.
Q: Are you bullish on all markets?
A: Not on bonds. We’ve seen the low yields in bonds. Now we’ll see them gently rising. There is the potential for a major rout if everyone heads for the exit, but central banks will ease the transition out of bonds into stocks. That rotation might take two or three decades. There are no inflationary pressures to cause central banks to think that interest rates are far too low.
Q: In conclusion, you sound pretty cheery.
A: I am in terms of economic development. I ‘m not quite so cheery about inequality and the issues that that raises. If you’re not an owner of assets, particularly property assets and stocks, your wages aren’t going to rise by the same amount. The top 10% or 1% own the vast majority of those assets which, as economies develop, will rise by a much greater amount than wages. That can create conditions for some significant upheaval. I don’t see political leaders having a very coherent solution to that.
Q: So politics could rain on your parade.
A: Yes, of course. Historically, if you study the real-estate cycle over 200 years in the UK and the US, the only thing of any significance that interrupted it are the two world wars. They fundamentally started as political issues and geopolitical tensions. There is the possibility that something like that could happen again. That would have an impact on how the cycle unfolds.
I hope that we still remember how that started and unfolded. I certainly hope that nothing on that scale would be around the corner. But sometimes these things can spiral out of control. I don’t see it as a big risk at the moment but you have to be alive to that possibility.
What does Akhil think is coming next?
Until next time,
Associate Publisher, Southbank Investment Research