Site icon Directional Advisors

What I Care About This Week | 2021 Mar 29

Photo by Ingo Joseph on Pexels.com

by Franklin J. Parker, CFA

The Summary

The Details

Almost every economic growth model carries population growth as an input. All else equal, growth in population tends to fuel growth in the economy. Economists, then, spend quite a bit of time attempting to forecast how much the population will grow in the coming years.

As The Economist recently reported, Covid appears to have slowed the birth rates in developed countries, contrary to some predictions. The US and China, for example, saw a 15% decline in births in 2020. Of course, most developed countries have long had native birth rates well below the 2.1 children per woman required to maintain their population, so Covid has simply compounded a problem that has been in the works for some time: peak population. With the recent global deaths from Covid and the reduced birth rate, it appears the human population is now likely to peak and then begin declining sometime around 2050—about a decade sooner than previously expected.

And it isn’t the absence of labor force growth that is of most concern, that effect is likely to be offset by automation. It is the decline of innovation that carries the largest economic consequence. With fewer minds to solve problems, fewer problems will be solved. Standards of living could then begin to slow and reverse. If global fertility rates stabilize below the required 2.1 children per woman, mankind will have to learn to deal with a new problem: getting economic growth from an ever-smaller population.

There have been, of course, no shortage of doomsayers through the years proclaiming the coming decline of humanity. What those doomsayers repeatedly fail to remember is the power of unbridled innovation. Just when economists were predicting great famines across Europe due to lack of food, Fritz Haber invented a way to capture nitrogen from the air and make fertilizer. Crop yields massively increased and the famines were averted. Just when England had felled all her forests in support of the “great wooden wall” that was her navy, shipbuilders turned to steel and built inconceivably powerful ships.

In the end, I tend to believe in the plucky and inventive nature of mankind. We tend to solve problems, and I think this will be no different. Even so, population growth has slowed in recent years. One lesson that Japan has given us in recent decades is the drag on economic growth that ageing and shrinking populations can create in modern economies. While this is, in many ways, “tomorrow’s problem,” it is a large-scale force that we must consider as investors.

Chart of the Week

Despite all the market drama of the past month or so, the main stock market index, the S&P 500, was only down 5.8% peak-to-trough. After rallying back off of its low, it pulled back a mere 3.4% in the most recent two weeks. It is important to put these recent market moves in perspective, because once we do, it becomes clear that this is all pretty normal and shouldn’t be concerning to long-term investors.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

Exit mobile version