“Those who cannot remember the past are condemned to repeat it,” Spanish-American philosopher George Santayana wrote in his 1905 book, The Life of Reason. Clichés like this can grate, but as we’ve seen from the calamities of the past few decades, most people ignore this advice at their peril—especially when it comes to the nothing-if-not-cyclical economy and financial markets.
But don’t take it from one silly moralizing reporter; take it from Goldman Sachs’ strategy guru Peter Oppenheimer.
In an interview with Fortune, Oppenheimer detailed the lessons he learned by studying the history of economic and market cycles while writing his recently published book, Any Happy Returns. The first and most important of these lessons was clear in our conversation: “When we look at history over a very long period of time, we find repeated economic and equity cycles that tend to exist within supercycles, or long-term secular trends.”
Put in other words, history tends to repeat itself, but with a new twist each time. Oppenheimer, who serves as Goldman’s chief global equity strategist and head of macro research in Europe, argues that this means a study of economic history can teach us what lies ahead—and how best to navigate any new environment.
The Wall Street veteran calls the current economic era “the post-modern cycle,” but he’s not talking about the philosophical movement that rejected precepts of the Enlightenment. Oppenheimer sees a combination of economic forces from bygone eras ahead, with an AI and green-energy twist to spice things up. If he’s right, expect higher interest rates, lower growth, increased conflict, surging government deficits, and, maybe, a technological revolution that helps us get through it all largely unscathed. Here’s what Goldman’s strategy guru sees coming in the 2020s.
The clashing characteristics of the ‘post-modern cycle’
Higher interest rates and rising government deficits
First and foremost, Oppenheimer argues, the “post-modern” era will be defined by higher interest rates, and therefore higher borrowing costs for businesses and consumers.
When it comes to interest rates, Oppenheimer’s view is similar to that of Jim Grant, the longtime market watcher who authors the newsletter Grant’s Interest Rate Observer. As Grant, a modern economic historian of sorts, previously told Fortune, a 40-year cycle of rising interest rates is coming for the U.S. economy. He notes that, since 1981, there has been a consistent, if nonlinear, trend of falling rates, capped off by the near-zero interest rate eras that came after the Global Financial Crisis of 2008 and again during the pandemic. But Grant expects that trend to reverse in the current 40-year cycle, with interest rates steadily rising as a result of geopolitical tensions, aging populations, and a number of other factors.
Oppenheimer’s take is slightly different. He argues that the higher rates of the post-modern cycle will last closer to 10 to 20 years, unless we get a repeat of “1970s-style inflation,” which he sees as unlikely. Interest rates are also likely to fall in the near term. Like most experts, Oppenheimer believes the Fed will cut rates in 2024 with inflation fading—but says the trend of falling rates can’t last.
“While rates are likely to come down from this cyclical perspective, they’re not likely to trend lower over the next decade or so,” he noted.
There are a few reasons behind this prediction. First, the “deflationary pressures” that hit the economy post–financial crisis—increased globalization, the rise of e-commerce, extreme household debt levels, and excess global production capacity—are now fading. That means we won’t need “emergency low levels” of interest rates anymore, Oppenheimer said, alluding to former Federal Reserve Chair Ben Bernanke’s revolution in monetary policy during the Great Recession, when he took a page out of Japan’s playbook and slashed rates to near zero to keep the U.S.—and the global economy, indirectly—on life support.
“A second factor, which is also emerging, is governments around the world are borrowing more money, [and] government deficits are rising,” Oppenheimer added.
Increased defense spending costs, aging populations, and regionalization are a few of the factors that are already forcing governments to spend more money in the post-modern economic cycle. And rising government deficits can raise concerns about sovereign creditworthiness—or a nation’s ability to repay its debts over the long term.
Oppenheimer argues that these fears over government debt sustainability will cause so-called risk premia—or the extra return investors require to compensate for increased risks of lending to a government—to rise substantially in the post-modern cycle. “In other words … there’s going to be a higher cost of capital in a world where you’ve got higher deficits, more conflict, and more geopolitical uncertainty,” he said.
To his point, late last year, the New York Federal Reserve’s measure for the risk premium that investors require in order to buy 10-year Treasuries turned positive for the first time since 2017. Jean Boivin, head of the BlackRock Investment Institute, gave a simple explanation for the move. With the national debt surging, and geopolitical risks rising, “the risk of holding long-dated bonds is higher,” he told Bloomberg.
Changing demographics, tighter labor markets, and slower growth
Changing demographics, particularly in developed economies, will be another feature of the post-modern era, according to Oppenheimer. With birth rates in developed nations declining worldwide and many of those same nations trying to limit immigration from poorer countries, OECD populations are aging. In the U.S., the number of Americans over the age of 65 is expected to jump 47% from 58 million in 2022 to 82 million by 2050, according to the Population Reference Bureau.
Aging populations will lead to rising “dependency ratios,” Oppenheimer said—the term for the number of zero-to-14 and over-65 individuals per working-age person in a given population. And higher dependency ratios will increase the cost burden on governments for social programs and health care spending, driving more borrowing and a higher tax burden to pay the bill.
Aging populations also mean fewer workers and tighter labor markets. While that may be good for those workers, it’s not great for businesses or economic growth. “Tighter labor markets will push up costs and probably mean that corporate profit margins don’t really rise in the way that they’ve done in the last couple of decades,” Oppenheimer explained.
Global population growth has also been cut in half over the past 50 years, from 2% to just 1% annually, and the UN is forecasting it will drop to zero by 2075. Lower population growth will likely reduce the “long-term trend rate” of global economic growth by increasing government deficits and the frequency of labor shortages, according to Oppenheimer. Shifting consumer spending patterns will also favor health care or eldercare investments instead of new technologies that could boost productivity and economic growth, he predicted.
Geopolitical tensions, increased conflict, and regionalization
Deglobalization has been a big theme of the 2020s. But Oppenheimer argues that we’re not really experiencing true deglobalization, but something more like “regionalization.” With U.S.-China tensions still brewing, and the Russia-Ukraine and Israel-Hamas wars sparking supply-chain crises, companies around the world are rethinking where they build products and source inputs.
Ongoing regionalization will be expensive, at least at first, and will also serve to slow economic growth globally. “And in a world where you’ve got more conflict and geopolitical uncertainty it is probably going to push the cost of capital higher as well,” Oppenheimer noted. “That’s one of the factors that is likely to generate lower returns in financial assets over the next few years.”
Increased conflict is another major concern. As we’ve most recently seen with Houthi attacks on cargo ships in the Red Sea, which have sparked a wider shipping crisis, conflict can increase inflation and slow economic growth. Overall, Oppenheimer warned that we’re now “in a less globalized world. One way there’s more geopolitical risks.”
The twist: Decarbonization and AI
Many of the features of the post-modern era, especially higher interest rates and lower growth, have appeared time and again throughout history. But there are two truly new secular trends that will shape the coming decades: decarbonization and AI.
They amount to “two very different shocks,” Oppenheimer argued. AI and other advanced technologies like robotics and 3D printing will be a serious deflationary force in the global economy in the post-modern era, he said, as they will increase productivity and reduce labor costs for businesses. But decarbonization is a different story.
“Building a decarbonized green economy is going to be hugely costly and inflationary,” Oppenheimer said. “Because you need to rebuild infrastructure for renewables, and the distribution of renewable energy. And at the same time, if you’re moving to a more regionalized global trading system with more protected industries and more tariffs, it’s all likely to be more costly and more inflationary.”
That sounds bad in the short term, but it should reverse in the long term. Once the world gets past “the hurdle of the cost,” Oppenheimer said, a more decarbonized, renewables-driven economy should lead the cost of providing energy to collapse, boosting economic growth.
AI is likely to follow a similar pattern, Oppenheimer added. The buildout will be expensive, but the long-term productivity growth will be immense. “Both will provide big challenges in the short term, with big opportunities, I think, in the longer term,” Oppenheimer said.
And while many fear that AI will devastate the labor market, Oppenheimer argued that’s not likely, based on history. “One thing that we can learn from historical innovations is that they do have a major impact on the labor market—absolutely, they do—but they typically don’t displace a lot of jobs. They often create new businesses and services, which ultimately create new jobs,” he said.
How does an investor navigate the ‘post-modern’ era?
Higher interest rates, lower growth, rising government deficits, aging populations, geopolitical tensions—let’s be honest, the ‘post-modern’ era doesn’t sound like a friendly environment for investors. Even Oppenheimer admits that, unless the positive impact of AI surprises even the most optimistic of experts, this era will come with “lower returns.”
With that in mind, he recommended investors focus on a long-term investment horizon, and buy companies that are not only profitable, but also either rapidly expanding or paying dividends.
Diversification among geographic regions, assets, and styles (i.e., growth, value, etc.) will be another important factor for investors. With more geopolitical uncertainty and the potential for increased conflict, it makes sense to spread risk around, but also invest in companies that will benefit from trends like AI or decarbonization.
After years where passive investing was the name of the game, it may also make sense to become more of an active manager in the post-modern era—buying and selling assets when logical, instead of holding them indefinitely.
“In a sort of flatter economic environment with lower returns, I think two other things become important. One of them is diversification,” Oppenheimer said. The other is “differentiation, really identifying winning companies, rather than just assuming the index itself is going to generate very high returns.”
