Let’s face up to not being on the same trajectory that was laid out in the second half of the 20th century — the one of peace, prosperity, and stability.
There were some extraordinary conditions then that helped to usher in decades of strong economic growth and that aren’t being repeated today.
One, as discussed previously in this column, was fortuitous demographics. The surge of baby boomers entering their most productive working years in the late 1970s and 1980s was remarkably growth-enhancing.
Another was a stable geopolitical environment. Sure, the cold war was tense, but it was a remarkably stable tension that enabled capital investment to flourish. And the post-cold war era was remarkably stable too.
Today, times are different. Population growth, at least in developed economies, is dwindling. The Census Bureau forecasts that U.S. population growth out to 2026 will average 0.04% for native-born citizens and 0.25% for immigrants annually (thanks to Cheryl Smith for those numbers). Germany’s population at the end of the century will be about 40% of what it is today, and the numbers are similar for the rest of Western Europe and Japan. That doesn’t mean that global economic growth will collapse. There will be global growth – but it will just be coming from emerging markets where population growth still is robust.
And geopolitics? You know where we stand. The best you can say is that we’re in flux.
Brian Singer of William Blair suggested at a recent CFA Institute conference that the correct analog to today’s world would be 1900 – 1935. That is, we don’t resemble the late 20th century. We resemble the early 20th century.
In the 1900-1935 era, there was then, as there is now, geopolitical instability. Then, as now, there were high levels of sovereign debt among the leading powers – and in the case of Germany, it was debilitating.
Trade policies were protective – something that’s being foreshadowed today. The Smoot-Hawley Tariff of 1930 lasted only four years, but along with retaliation from other nations, it was so devastating that global trade collapsed. U.S. exports fell 61% between 1929 and 1933. US GNP almost halved in that time.
The late 1920s and 1930s also were a time of high political polarization and populism. Remember Herbert Hoover, a populist protectionist president who came to office in 1929 when wages were stagnant and income inequality was on the rise?
None of this is to say, of course, that we’ll follow the course of the 1930s. This is not about doom and gloom. Not at all. But as we look out on the world now and think about how to invest in this environment, let’s remember that there’s little reason we should expect an easy return to the innocent, high-growth, pre-9/11 globalized days of the 1980s and 1990s.
The 2-Minute Thought will be off for Thanksgiving and return on November 30, 2017.
