Macro Perspective: Is Industrial Age Growth Fake Alpha?
Here’s a question: is industrial age growth is an exercise in fake alpha?
If you’re not familiar with the concept—and even if you are—let’s revisit how Raghuram Rajan, who coined the term, defines it:
“How, then can untalented investment managers justify their pay? Unfortunately, all too often it is by creating fake alpha: appearing to create excess returns but actually taking on hidden tail risk”
Let’s unpack that. It's a concept that's about earning returns that are “fake”, because they’re diluted by unseen “tail risk”: the risk of low probability, high-impact events. Like meteorite strikes—or crises.
So here’s my question, rephrased: how would we grade ourselves as investment managers of the shared future?
I’d suggest that, when you think about it, fake alpha sounds like an elegant description of industrial age growth—and it’s shortcomings. Consider, for a moment, the varieties of deep, often hidden tail risk that growth as we know it is dependent on—and generates.
Species risk. The most obvious kind of tail risk is also the biggest: risks to our species, and to other species. Industrial age growth is inextricably linked to the risk of catastrophic, sudden climate change. We can debate about how severe this risk—just how far up the tail it is. But what is clear is that growth, output, profit are all diluted by this tail risk: fake alpha.
Macro risk. Growth is also linked to more, and more severe, financial and economic crisis—because in a globalized world of integrated capital markets, hot money can sear into and out of countries at lightning speed. Result? Bubbles, crashes, misallocation, malinvestment, and foregone future (like when post-crisis inflation or devaluation wipes out your life savings). Effect? Emerging markets stockpiling foreign currency reserves, to shield themselves from hot money outflows. And that results, of course, in the amplification of macro risk: a greater probability of crisis, as imbalances pile up: tail risk feeding back on itself.
Political risk. Industrial age growth depends on monopolies—think patents, copyrights, and the like. But the flipside is that competition becomes a contest for lobbying to attain those special privileges. Today, the highest yielding investment many boardrooms can make isn’t in innovation—but in politicians. Result? Political systems that are gummed up, trapped in gridlock, lurching from crisis to crisis, because the costs of making welfare-enhancing decisions perpetually rise—as in Japan, and now in America. That’s political tail risk: fake alpha.
Social risk. In industrializing economies, society usually takes a big hit. Trust, affiliation, and community slowly but surely disintegrate as societies atomize. It’s because industrial organizations demand the deconstruction of rich, local, historical, enduring, relatively flat ties—and their reconstruction into weaker, thinner, more transient hierarchical ones: call it the cog-in-a-machine effect, and think migrant workers leaving their hometowns for a shot at a better life. Though it’s individually rational, the net result is social tail risk: societies that splinter and disintegrate. Conversely, you might think of social risk as the losses to society that are inevitably externalized in bailout after bailout. Unless you think markets and organizations can exist in a perfect vacuum, devoid of social institutions, eviscerating society is a tail risk of depth and resonance.
Emotional risk. America’s got the highest rate of mental illness in the world—and perhaps the highest rate ever. It’s another kind of tail risk: call it emotional risk. Industrial age growth is pitted against emotional intelligence, development, and maturity—it’s about largely treating people as infantilized producers and consumers (with predictable results on happiness, purpose, and meaning). Though you might think an economy of emotional zombies is a pathway to advantage, it assuredly isn’t: zombified, unhappy people are less engaged, trusting, self-directed, innovative, creative, and disruptive. So unless you want rest on yesterday’s laurels, well, forever, emotional stunting is a deep, and very real, tail risk, that eats into lifetime returns: fake alpha.
I could go on, with several more flavors of deep risk, but I suspect you get the point. So here’s what I’d argue.
If we wanted to rank ourselves as investment managers of the shared future, I’d give us a failing grade. I’d argue that we’re seeking, to a large extent, fake alpha, “profit”, “output”, and “product” that’s offset and counterbalanced by deep, rising risk. Let me translate that into slightly more resonant terms.
We might just be mispricing humanity’s biggest asset: prosperity. If industrial age growth is an exercise in fake alpha, then the risks above it render it worth less than is often blithely assumed—sometimes, as this year in America, literally almost worthless, an empty exercise.
When we misprice prosperity, the result isn’t plenitude—it’s limbo. Think a zombieconomy, that though it lurches on, staggers forward, isn’t really living. It’s undead, caught in limbo.
Rebooting prosperity—attaining authentic alpha, if you like—means developing a more nuanced, subtle, and fundamentally meaningful definition of worth—and it’s opposite, risk. By ignoring the deep risks above—and, more deeply, ignoring the transformation of deep risk into deeper Knightian uncertainty, as Nassim Taleb has eloquently pointed out—authentic prosperity is going to remain unattainable.
So here’s my advice. Today’s great challenge for economies, countries, companies, and investors isn’t earning yesterday’s fake alpha—but learning to ignite the real thing. And that means getting hands on with 21st century economics—like those above. Because if creating 21st century advantage is your goal, you might just have to break out of foregone prosperity’s gloomy limbo.
