Terry Smith believes a major economic correction is 'massively overdue'. He argues the last normal downturn was in the early 2000s, as the 2008 crisis was mitigated by bailouts that prevented systemic failures (besides Lehman). This lack of 'creative destruction' has left the system vulnerable and imbalanced.
Related Insights
Policies designed to avoid economic downturns at all costs can lead to significant long-term risks. Capital and labor become trapped in inefficient companies that would otherwise fail, hindering productivity growth and creating a less dynamic economy.
Veteran investor Jim Schaefer notes a recurring pattern before recessions: a massive, euphoric movement of capital into a specific area (e.g., telecom in 2001, mortgages in 2008). This over-investment inevitably creates systemic problems. Investors should be wary of any asset class currently experiencing such a large-scale influx.
The advent of super-intelligent AI challenges the core tenets of free-market capitalism. When human labor competes against entities that are exponentially more capable, the 'creative destruction' model could lead to mass unemployment and social instability, forcing a move away from pure capitalism.
The theory of "creative destruction" suggests recessions can be beneficial by purging unproductive firms and reallocating their resources to more efficient ones. The goal isn't to engineer downturns, but to allow this natural, cleansing process to occur when they happen.
Three economists won a Nobel Prize for framing 'creative destruction' as the engine of modern progress. Unlike pre-industrial eras with stagnant growth, the last 200 years have seen constant improvement because society allows new technologies like cars to destroy old industries like horse transport.
The economy is now driven by high-income earners whose spending fluctuates with the stock market. Unlike historical recessions, a significant market downturn is now a prerequisite for a broader economic recession, as equities must fall to curtail spending from this key demographic.
A whole generation of market participants has never experienced a true, prolonged downturn, having been conditioned to always 'buy the dip' in a central bank-supported environment. This lack of crisis experience could exacerbate the next real recession, as ingrained behaviors prove ineffective or harmful.
The system often blamed as capitalism is distorted. True capitalism requires the risk of failure as a clearing mechanism. Today's system is closer to cronyism, where government interventions like bailouts and regulatory capture protect established players from failure.
The economic system champions individual responsibility for the middle class but provides government bailouts and shields large corporations and the wealthy from failure. This cronyism prevents creative destruction, calcifies the class structure, and stifles opportunities for new entrants.
The U.S. economy's only viable solution to its long-term debt and inflation is a "beautiful deleveraging"—a painful but controlled economic downturn. The alternative is delaying and being pushed off the cliff by market forces, resulting in a much more severe and uncontrolled crash.
