I tend to come down on the optimistic side of things. No panicking during market selloffs, no short selling, a glass half-full outlook. That kind of thing. But sometimes you have to look at the not so optimistic side.
Global growth has been subpar for some time now. Even though the U.S. is experiencing the longest recovery in history, our growth is not what it was in past recoveries. We have tried most all the tricks to grease the wheels of business. Taxes have been reduced, Federal spending has increased and, as the chart above shows, Federal borrowings have jumped dramatically. Nothing seems to have boosted the growth rate dramatically however. Outside the U.S. growth is no better. Germany is one of at least five major economies teetering on the edge of recession and China (see chart below) is starting to look more and more like Japan of 20 years ago, when stagnation set in. The Chinese population is shrinking just as the government encounters headwinds to stimulating the economy. At some point China will find it more difficult to fund a new round of subways, high speed trains and bridges.
But the optimists here are not concerned. According to Modern Monetary Theory, as long as interest rates are low and inflation non-existent, and as long as the economy continues to grow faster than the cost of borrowing, then all is fine. But things are always OK until the moment they are not OK.
Ruchir Sharma, the Chief Global Strategist at Morgan Stanley, has an interesting take on the world today. As he sees it, economic growth boils down to two things – how fast the working age population is growing and how productivity performs. If the work force is growing every year and workers are producing more widgets per hour then you are going to get economic growth. But today the lines are moving in the wrong direction. Forty-six countries around the world including Japan, Russia and China have declining populations. In addition, productivity almost everywhere has disappointed. The U.S. has seen productivity decline from 2% – 3% annually in the past to something more like 1% – 2% today.
What does this all mean? Well first it means that fiscal initiatives like reducing taxes, increasing spending and bumping up the Federal debt may not be as powerful going forward as they have been in the past. Second, we may have to rethink what we expect from the stock market and the economy. Sharma argues we have to reduce our overall global growth expectations. Fast growing emerging economies may not be able to do 10% growth a year. It may be more like 5%. Middle income countries like China may grow only 4% and developed countries like the U.S., 1% – 2%.
When you reduce future growth rates you also reduce profit growth and when profits grow more slowly investors may not be willing to pay as much for stocks. I am still a glass half-full type of guy but the clouds on the horizon are definitely starting to look a bit more ominous.
