As a global economist, best-selling author and member of a number of corporate boards, Dambisa Moyo has to keep an eye on all things macro. And while there are plenty of issues Baroness Moyo — a member of the House of Lords — is thinking about, she told Pensions & Investments that she’s thinking about three in particular right now.
The first is the risk of market bubbles in a world where interest rates are set to be cut — despite record highs in markets. The S&P 500 closed above 5,000 for the first time in February this year, taking almost 75 years to cross that threshold and driven by the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) stocks. Those seven companies gained over 100% in 2023, vs. 24% for the rest of the index. The federal funds rate, meanwhile, was at the 5.25% to 5.5% mark. The U.K. FTSE 100 closed at an all-time high in April, while interest rates sat at 5.25%.
“So it’s this idea of, wait a minute — if it’s already that much of a bubble in a world in which (interest) rates are where they are right now, what happens when people are able to borrow more cheaply?” Moyo said, speaking in an interview ahead of her keynote presentation at the dialogue session of the P&I WorldPensionSummit London Pension Fund Tour, to be held on June 12. Added to that is a rising private credit market, where market commentators have been warning over red flags, she said.
And although markets are reaching all-time highs, there is history to look at for an idea of what could come next, such as the 1929 Wall Street Crash, Japan’s stock market bubble in the 1990s, and the 2008 global financial crisis.
“There are lots of examples of where you have that confluence of leverage (and) low interest rates, creating these asset bubbles — so we know it’s coming. The question is, what do we do with that?” Moyo said.
Disconnect
Moyo started her career at the World Bank, and was a global economist at Goldman Sachs for capital markets.
But her experience doesn’t stop at economics — she also translates into practice what she sees in the economy and markets. She’s co-principal of family office Versaca Investments, overseeing the long-term endowment model and allocating more than $1 billion in assets with a focus on growth equities, and she’s on the boards of Chevron, Conde Nast and Oxford University Endowment Fund’s investment committee. The university has about £6 billion in endowment assets.
And translation into practice — or rather, lack of translation — forms the basis of the second issue she’s thinking about: “that there seems to be two economies. We have the financial economy, which… is in this bubble. But then, the real economy seems to be doing quite poorly — (investors) are still worried about inflation, interest rates are still too high, people are worried about their mortgages, pensions, they’re worried about wages,” she said. “And it seems like there’s this weird dichotomy,” Moyo added.
On paper, major economics are moving from quantitative easing to quantitiative tightening. “But actually, as a practical matter, that’s not what’s happening: Liquidity is not coming out of the system as quickly as people might think and, in fact, about 70% of mortgages in the United States are done outside the banking system, as are leveraged loans,” she said.
When the real economy is in that situation, it’s “why you hear about Trump rising,” she added. Business intelligence firm Morning Consult said on June 3 that Trump had maintained his lead over President Joe Biden even after the former's guilty verdict.
AI winners and losers
The third theme she’s thinking about is artificial intelligence — and she’s spent a lot of time educating herself on it.
Moyo admitted that her original views on the topic had been “pretty basic.” Would there be productivity gains? Yes. Will world GDP increase? Yes, she said, citing a PWC study showing that AI could contribute $15.7 trillion to the global economy by 2030. Will there be issues around business model changes as fewer staff are needed to work with AI? Yes.
So over the past year, Moyo has spent time on the road, delving into the details of AI with technology experts.
“There are going to be major math winners and losers — and I think it’s going to be far more extreme than what I thought last year,” she said.
To illustrate the point, Moyo points to the Magnificent Seven companies’ estimated capital expenditures spent on AI of about $350 billion per year — about the same as the total amount of research and development spent by Europe. “So already, we’re starting to see the split, because those guys are going to be massive winners in that,” she said.
From an investment point of view, there’s about $130 billion of venture capital money flowing into AI-focused companies. An expectation of a 20 times price/earnings ratio is “the reason (investors are) investing, because they think they’re going to get 20x P/E… That’s $2 trillion of returns. That is almost 10% of the U.S. economy. It’s possible there’s going to be a lot of companies going to zero,” she warned.
She also thinks the growth curve for technological companies will be different from the past's "S" curve.
“There’s not as much of a requirement for infrastructure” vs. for previous technological advances, such as personal computers, which had to be manufactured and shipped out.
With AI, “we already have the infrastructure. It’s already on our desks. It’s just a matter of apps being built.”
There’s also a question hanging over productivity gains, such as in healthcare, she said — adding that today’s leaders may become laggards with further advances.
