In recent years, we’ve seen the rise of what I like to call ‘pet industries’—sectors that seem to thrive not on genuine consumer demand but rather through government support and mandates. This trend prompts some important questions: How sustainable are these industries really? And what happens when political winds change? For investors, the implications could be significant, as these sectors might become increasingly fragile, relying heavily on state intervention to survive.
Historical Context: Lessons from the 2008 Crisis
Reflecting on my time at Deutsche Bank, the financial crisis of 2008 provided invaluable lessons about market dynamics and the necessity of consumer-driven commerce. During that tumultuous time, we witnessed firsthand how misaligned incentives and overreliance on government support led to systemic failures. The banking sector, heavily propped up by state interventions, faced severe consequences when political priorities shifted, exposing the vulnerabilities of industries that failed to adapt to the shifting market landscape.
This brings us to the emergence of pet industries—think European steelmakers or the global electric vehicle (EV) sector. They are not just beneficiaries of regulation; they are fundamentally shaped by government mandates that dictate which traits are considered desirable. This kind of artificial selection disrupts the natural competitive environment, resulting in industries that may struggle to thrive on their own.
As these industries pivot to meet government standards instead of responding to genuine market demands, they risk becoming maladaptive. Take European steelmakers, for example, who are required to achieve net-zero emissions by 2050. While investing in new technologies is essential for compliance, it also dramatically increases costs and jeopardizes their global competitiveness. Isn’t it a bit concerning that these industries could end up shackled by regulations rather than being empowered by market forces?
The Mechanisms of State Intervention
State intervention often claims to rectify perceived market failures. Policymakers argue that consumers undervalue certain attributes—like carbon emissions—necessitating government action to guide industry evolution. This intervention fundamentally alters the essence of commerce, affecting everything from product traits to the industrial processes behind them. By favoring certain companies while penalizing others, the state distorts financial selection—much like the biological concept of sexual selection—creating a pet industry that caters to government preferences rather than actual consumer needs.
However, these interventions come with significant risks. As we’ve seen, government handlers can be inconsistent, especially in democratic systems where political priorities may shift overnight. For instance, the recent challenges faced by the European steel industry underscore the pitfalls of depending on state support. Instead of adapting to market dynamics, industry leaders often shift the blame onto the government for inadequate backing, overlooking the critical need to align with consumer demands.
We see similar patterns in the automotive sector. The U.S. government has mandated that EVs make up a significant portion of new car sales by 2032, yet consumer adoption hasn’t kept pace with these ambitious expectations. The result? Unsold EVs piling up on dealer lots, highlighting the stark disconnect between government policy and real market demand. Isn’t it puzzling how such a well-intentioned mandate can lead to such unintended consequences?
Regulatory Implications and Market Perspectives
Understanding the regulatory landscape surrounding these pet industries is crucial for investors. While government support may create an illusion of stability, this reliance carries inherent risks. Political shifts can rapidly alter the justification for state aid, leaving these industries vulnerable to sudden policy reversals. As Holman Jenkins of the Wall Street Journal pointed out, the rationale for supporting EV investments shifted from environmental necessity to merely preserving a market dominated by government-created industries.
Looking ahead, the burning question remains: what happens when these industries can no longer count on their state handlers? The painful process of realigning to consumer demands will be necessary, albeit fraught with challenges. The recent downturn in EV sales in Germany, following the removal of consumer subsidies, serves as a sobering reminder of this risk. Without consumer backing, even the most heavily subsidized industries can falter. How many more wake-up calls do we need before we start to rethink these strategies?
In conclusion, the future of pet industries is shrouded in uncertainty. Their survival hinges on two critical factors: either securing ongoing support from current political leadership or effectively engaging with new policymakers who may have different priorities. For investors, staying alert is key. The path forward may require these industries to shift their focus from state demands to genuine consumer needs. If they fail to navigate this transition, the repercussions could be significant for both the industries themselves and their investors.
