How New Societal Norms Could Drive the Lowest Economic Gain in Decades (great...)

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1. How New Societal Norms Could Drive the Lowest Economic Gain in Decades (great...)

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How New Societal Norms Could Drive the Lowest Economic Gain in Decades (great...)

The Chairman of the World Bank announced he is resigning from his term a year early

Prior to leaving, his administration shared a report titled "Falling Long-Term Growth Prospects", referring to falling long-term GDP growth around the world due in the 2020's

GDP growth or economic growth is one the most important macro economic drivers for growth in markets and employment

More people spending, more money being made, more investing back into the business, more productivity gains, rinse and repeat

From 2000-2010 the world GDP grew by 3.5% compared to 2.6% from 2011-2021

The World Bank expects GDP growth in the 2020's of 2.2%

This would mean larger economies like the US would expect to average 1% GDP growth over the DECADE

Here is a brief note from Neil Howe, American author and researcher on some of the drivers of this bleak world GDP outlook, including demographic growth

Demographic slowdown

Among the more affluent nations, the most important and inescapable reason for lower GDP growth is slower demographic growth. By 2026 or 2027, amazingly, the growth rate of the working-age population in the entire high-income and emerging-market world (per UN projections) will turn from slightly positive to slightly negative. There it is. The single most durable driver of economic growth since Adam Smith and the industrial revolution, more workers every year, will finally reverse direction.

But demography isn’t the only shadow looming over the coming decade. Levels of investment are also in broad decline. This includes not just physical investment, but also human capital investment as measured by basic “human development indicators.” (Example: U.S. life expectancy peaked in 2014 and has since declined in 5 of the following 7 years.) And then, compounded on top of a slow growth rate in employment and capital stock, is a further decline in total factor productivity (TFP).

Younger Generations

Another important topic outlined by the World Bank is the discontent of younger generations on the labor market

Howe outlines this in greater detail below:

Younger workers are losing hope of upward generational mobility. Barely half of Millennials and Gen-Xers (that is, anyone born after 1960) are out-earning their parents at age thirty or age forty. Less than half of young men are out-earning their fathers. And even fewer of any of these groups think they are doing as well economically as their parents.

Not long ago, to be an American was to be a rule-breaking, risk-taking individualist who believed that flouting convention somehow made everything better over time. That still describes many older Americans. It doesn’t describe many young adults. Today’s rising generation, shell-shocked by the pervasive hollowing out of government, neighborhood, workplace, and family, is looking for any safe harbor it can find. Millennials seek not risk, but security. Not spontaneity, but planning. Not a free-for-all marketplace, but a rule-bound community of equals.

Younger generations, meanwhile, are souring on democracy. At last count, Americans today in their thirties are less than half as likely as Americans over age sixty to agree that “it is essential to live in a democracy.” A small but rapidly rising share of the young (about a quarter, twice as large as the share of the old) say democracy is a “bad” or “very bad” way to run the country. Most of these would prefer military rule. The young increasingly associate democracy with sclerosis and incapacity. For most of their lives, they’ve understood that the only organizations America still trusts to get things done are the Pentagon and Google. So many of them wonder: Isn’t it time we just get on with it?

Side note: I believe all people unhappy with democracy should be have a 3 month all expense paid trip to a socialist country and then fly back and let us know what they think!

The generational contrast is stark. Today’s older generations, including most of America’s leaders, were raised amid rising abundance. For them, the middle class was always growing and mostly accessible. One word they heard frequently was “affluence.” They have few memories of any great national crisis, but grew up enjoying strong institutions built by adults haunted by such memories.

Today’s younger generations were raised amid declining abundance. For them, the middle class was always shrinking and mostly inaccessible. Coming of age, one word they have heard frequently (its use has skyrocketed since 2008) is “precarity.” They cannot recall the presence of strong institutions and have grown up fearing—even expecting—another crisis in their absence.

In every sphere of life, this new mood of contracting horizons has been creating a new and different America.

Globally, America has grown more alarmed about its enemies, less generous toward its friends, more wary of everybody.

Overall, the economy is driven by people

People's consumption, peoples jobs, peoples income, peoples relationships with other nations for trade and productivity gains

A lot of those driving demographic factors are not trending in the right direction

It ultimately drives home a bigger point on markets and returns

The 2000-2008 tech boom and post-COVID 0% interest rate markets go up and up and up are what a lot of people are used to

It's driven to people like Dave Portnoy / Davey Day Trader saying things like "stocks only go up" and how "this isn't hard"

But what if that was the outlier and not the norm for the next decade?

What if interest rates are not pinned at zero and demographic factors are trending the wrong way?

It makes capital allocation even more difficult and more important

For example, if you can get 6% interest on a US backed bond, do you really have any desire to invest in a commercial real estate property with higher risk to get 7-8%?

Do you want to invest in higher risk stocks for the chance of making 15% 1 year and losing 10% the next year?

Capital allocation is hard because it is a game with pieces that are always moving

The macro drivers discussed above are driving GDP which directly impacts returns of risk assets like stocks

But, if you know where the puck is going as Gretzsky says, then you can be smarter than the average person about your capital allocation

- Dev

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.