Editor's note: The markets and our offices are closed on Tuesday, July 4, for Independence Day. Because of this, we won't be publishing Altimetry Daily Authority. Please look for your next edition on Wednesday, July 5.

As we celebrate American independence this week, we spend a lot of time reflecting on U.S. history...

But it's also a great time to discuss what lies ahead.

Practically overnight, everyone seems to have become an "expert" on the U.S. economy. The top ideas seem to be that the U.S. will remain a superpower for decades... or that our time is over and China will steal the title.

Consulting firm McKinsey added fuel to the fire recently. It published a report on global wealth in late May, stating that $48 trillion of U.S. wealth is on the line this decade.

Suffice it to say that the report wasn't exactly bullish...

In essence, McKinsey's report says the next decade isn't going to be like the previous two. Since the Great Recession, investment returns – or "paper gains" – seriously outpaced actual U.S. economic productivity. That's not sustainable in the long term.

The report also outlined four possible scenarios for the U.S. economy from here. We think two of them are more likely than the others.

So today, we'll look at all four scenarios... and explain what each might mean for investors.

Each of McKinsey's scenarios portrays a different outlook for the nation's wealth and productivity...

Here's a summary of the outcomes...

  1. A continuation of the past 15 years – meaning more paper gains and economic stagnation.
  2. A high-inflation scenario like the U.S. saw in the 1970s.
  3. The Japanification of the U.S. economy.
  4. A significant productivity boom that leads to a soaring market.

The first scenario, a continuation of the past 15 years, is possible... although not ideal.

It would mean running the risk of a serious investment recession into the future. That means even if the economy is growing, investment prices would fall. It's not sustainable for asset prices to surge without the economy backing them up.

The second option is for the U.S. to see a repeat of the 1970s. The economy would get stronger while asset prices suffer.

Again, this is possible... But inflation has already started to come down. What we're seeing is much more like the late 1940s than the 1970s. The economy has been chugging along, more or less, despite the challenges we've faced coming out of the pandemic.

The third option is scary – and it's one of the two most likely outcomes in our view. The Japanification of the U.S. economy means investments and the economy would completely stagnate, and companies would shrink.

High interest rates and a string of recent bank failures have put pressure on our lending market. That could cause banks to string along weak borrowers rather than letting them default.

But we believe the U.S. has the strength and position to avoid this. We don't face some of the governance issues that hurt Japan's bank sector.

Our banks aren't protected by complex conglomerate systems. So they don't have as much of an incentive to create "zombie" companies that can't afford the interest on their debt. 

That brings us to the 'golden' scenario...

The fourth option is that we get a significant productivity boom that drives the market higher.

McKinsey compares this scenario with something longtime readers are familiar with... the post-World War II economic boom.

The supply-chain supercycle will be a huge factor in making this scenario a reality. That's the wave of infrastructure investment that's just getting underway in the U.S.

Construction spending is booming. We think it can keep rising for years.

Companies are investing in infrastructure and supply chains. The government is supporting them. That clears the way for gross domestic product ("GDP") growth.

McKinsey highlights that while this scenario would lead to a lot more GDP growth, it would also lead to less wealth creation. Inflation would be slightly higher than the 2% target, so multiples wouldn't expand as much.

But in terms of setting the U.S. on a path toward long-term wealth creation, this scenario is ideal.

These are long-term outlooks... and the markets can change fast.

So you shouldn't put too much faith in any one scenario as the absolute truth.

That said, McKinsey recognizes the same potential we see in the supply-chain supercycle. In the near term, the U.S. needs to focus on and invest in its manufacturing capacity.

The government and corporations are ramping up investments in facilities, roads, bridges, and other kinds of infrastructure. U.S. production and supply chains will become more efficient as a result.

That is why we're so bullish on the supply-chain supercycle. The country's long-term wealth and economic health depend on it.


Rob Spivey
July 3, 2023