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The Coming Super-Crash in NASDAQ? The Global Population Implosion and the Decline of Stock Markets

I guess you noticed the swoon last week in the NASDAQ. I’m not bright enough to figure out where it goes next in the short-term. But I do have a couple of ideas about what will happen in the longer-term. The beauty about long-term guesses is that if I’m wrong, I won’t be around to have to take the brickbats

20 years ago the global literati were all up in arms about the coming global population explosion. Now it’s starting to look a lot more like we are going to face a population implosion. Rapidly declining fertility rates, the increasing propensity for educated women to delay childbearing or not to have children at all, are all leading to populations flattening out or even declining.

Most developed countries are in this category. That includes Europe and the US. The US is only managing to increase its population through high rates of immigration. Places like Japan are actually already seeing population declines. China of course is static. India is still rising but as it enters the next phase we can be sure that its population will flatten out too. Russia is heavily declining, although there are special factors at work (vodka, resignation).

The basic line of stock promoters is that, over the long-term, you can always count on stocks to increase on average, probably by about 10% per annum. Sure some years they might decline, but then there will be huge offsetting advances later. So they have convincing data showing how a stock portfolio will beat savings with interest.

Let’s see: stock markets have been around in a big way for around 100 years. That coincides with the largest absolute and relative population increases we have seen in the history of humanity. Is it the case that when you get large increases in populations (say almost 2% per annum), stock markets also do very well? In fact, is a relatively high rate of population increase over this period, related to the high growth rate of stock returns during that same period of time, especially in the second half of the 20th century? Wouldn’t that be a turn-up for the books?

There’s plenty of reason to think that the two are related. Increases in population lead to increases in production of everything and increases in sales and economic activity generally. Of course there will be variations caused by events such as recessions when the markets periodically over-reach themselves and correct. But over the longer-haul there is reason to think that population increases will be accompanied by increases in stock returns and stock indexes.

So if this relationship holds on the upside, what about on the downside? How would a declining population impact economic activity and stock indexes?

We all know about the growth of aged populations relative to younger people. The dependency ratio is increasing everywhere. Once those older people die the following cohorts will be smaller and populations will decline. Depending on how fertility rates evolve, this decline could become self-perpetuating, so that globally we would start to see a reversal of population increases. In other words we could move from population explosion to decline, if not implosion.

In that case, we could expect the relationship between population and economic activity to work in reverse. Economic activity would decline as populations did so. In that case stock indexes would likely decline too as would stock returns.

Think it’s far-fetched? We already have one working example, namely Japan. Its population is declining. It is suffering from rampant deflation while economic activity is gradually declining. Its debt to GDP ratio is the highest in the world as it has borrowed to try to counter these negative economic trends.

It’s starting to look like deflation is the canary in the coal-mine. In Europe, already afflicted by static and in some cases declining populations, deflation is an ever-growing concern. Check out France and Italy as cases in point. It’s also of concern in the US, even though the rate of population increase is higher than that in Europe. Most economists now believe that the problem in getting back to a “normal” rate of economic growth in developed countries is actually a secular rather than a cyclical phenomenon.

Of course, there are other factors such as technology and rising standards of living everywhere. Maybe these will offset declining populations by raising consumption and thus demand. But these would have to rise more than population falls.

That might be a stretch. Certainly so far that isn’t happening in Japan and Europe, the bellwethers. And it doesn’t even look like it’s happening in the US, where one would expect the more bullish case to occur. And on the other hand, how much technology can we absorb anyway (see my blog post here)? Is there a limit to that, and hence to our consumption capacity? If so, look out below.

Of course, none of this means that the NASDAQ couldn’t roar back to 4000 next week or to 6000 in a couple of months. Over our lifetimes, population changes might not matter so much.

But the rates of deflation in almost all developed countries are worrying and suggestive that something else is going on. If that something else is static or declining populations which are due to secular processes, then this is a game-changer and we have some serious rethinking to do about just about everything.









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Friday, 20 October 2017

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