Active Investing in the Age of Disruption. Evan L. Jones

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Active Investing in the Age of Disruption - Evan L. Jones


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contribution to investment alpha. If credit were to slow or rates rise, the weaker companies would falter and good research would be rewarded.

Graph depicts a thirty-year average US fixed mortgage rate from the year one thousand nine hundred and ninety seven to November two thousand and nineteen. Graph depicts the US outstanding credit card debt from the year one thousand nine hundred and ninety seven to October two thousand and nineteen.

      In total, the average US consumer has benefitted by approximately $1,000 per month since the 2008 financial crisis due to low rates and easy credit access. This is massive stimulus considering the average median income in the US is approximately $60,000 and has barely risen this decade. An increase of $1,000 after tax per month is more than a 25% after-tax income increase for the median household. If mortgage, auto loan, and credit card rates were to increase back to historical levels, consumer spending would drop precipitously causing significant problems for the overall economy.

Graph depicts S and P five hundred Consumer Discretionary Sector Price Index from the year two thousand and nine to October two thousand and nineteen. Graph depicts the university of Michigan Consumer Sentiment Index from the year one thousand nine hundred and ninety-four to October two thousand and nineteen.

      The power and breadth of low rates has clearly been the most important driver of financial markets in the 2010s, but technological disruption is a close second, and there is a synergistic relationship between the two most prominent forces of the 2010s.

       Innovation adoption tipping point

       Innovation and financial capital

       Outperformance potential with unprofitable but disruptive companies?

       Private markets overheating?

       Contrarianism and paradigm shifts

      Capitalism has always been about change and disruption. Joseph Schumpeter, the well-known Austrian economist, formulated his theories on innovation and capitalism back in the early 1900s. Popularizing the term creative destruction, Schumpeter conceptually described the path of innovation and its effect on the economy, specifically economic growth. Innovation comes in waves or cycles with every major innovation producing disequilibrium in the economy. At the same time, innovation creates new opportunities as new businesses are born and older business models are disrupted. As one innovation goes from idea to production to early adopter to mass use, the original innovation spurs new ideas and they develop on their own life cycle, eventually sending the original innovation into decline. There is a continual process of human innovation spurred by a capitalistic system that rewards innovation due to the ability to make money. This process of creative destruction has been occurring for decades and is generally positive for society.

      At the heart of capitalism is creative


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