Global population continues its sprint towards 9 Billion people (currently around 6.8 Billion). Peak Oil is upon us. The technology of chaos- Kalishnikovs, shoulder fired anti-aircraft missiles, internet viruses- continues to spread ever wider. Meanwhile, developed nations are crushed by a mountain of public and private debt while their income-generating capacity has been damaged by a flood of low-cost competitors and local market overcapacity.
It is easy to be pessimistic about the future, about western companies, about western banks, even human civilization in general.
But the real story is this- while a minority of mankind has been stuck near status quo for forty years, a majority has made significant gains, especially in the past twenty years. The anemic growth rates (some even negative) in the West have been met by double-digit growth rates in China and strong growth rates in the rest of the developing world- even sub-Saharan Africa. Global growth in the midst of financial turmoil remains relatively strong at over 3%.
Why is this good news? In addition to improved living standards for hundreds of millions if not billions of people, it also says a couple important things:
1. The global economy is not a zero-sum game. Progress for developing countries does not require the developed countries to fail. Low cost Chinese labor can beget Wal-Marts with lower cost goods and some day Chinese tourists, investors, and technology;
2. The global economy can make sense. For decades, the virtues of free trade, capitalism, foreign investment, and supply side economics have been touted. The results of these policies, and the victory of capitalism over communism after the dismal results for communist economies last century, shows that these policies can work.
So where does that leave us today? First, the American role in this growth has been clear. While providing the world's largest market for goods (electronics) and services (Indian call-centers), America has also provided large amounts of capital and the financial arrangements required to access it. The numerous debt instruments created have effectively reduced the risk of sharing capital, allowing long term interest rates to come down. Meanwhile, this financial engineering has allowed US firms to earn trillions of dollars by providing capital for global economic expansion. Our "cheap money" has led to better living standards, and in a world with nearly three billion people living on two dollars a day or less, this can continue for decades.
And with only 4% of the world's population, the US longer term market and production potential pales compared to the rest of the world. So foreign investment, foreign sales, and attracting foreign tourists will be key. So will the ability of Americans to continue to provide redeemable goods and services for US dollars. Shale oil, gas, grain, pharmaceuticals, software (remember most programming languages are in English), and high tech goods like jets that use that software will remain in high demand. So the Fed should be able to continue to pump out easy money to help finance global growth without significant inflation.
What does this mean for investors? First, easy money should support commodities. Gold, silver, oil. But beware substitutes and productive investments in emerging markets as a growing middle class seeks greater creature comforts. I expect gold to continue its upward trend. In my article "Where was the Inflation" three years ago, I pointed out that inflation during the bubble years was only a little above 2%, and the Fed has used two rounds of QE3 (with a third to come) to try to kickstart economic growth with minimal inflation outside gold. Add in the efforts of the ECB, and a great deal of money has been printed. Gold at $2200 a year from now seems a very real possibility given continued monetary easing, but continued downward pressure on labor rates will moderate inflation in CPI.
Secondly, multinationals with globally competitive businesses should continue to do well. Honeywell (HON), Emerson (EMR), IBM (IBM), Apple, P&G (PG), and even Microsoft (MSFT) should outperform both S&P 500 over the next decade as global growth remains strong. Their ability to access low cost labor coupled with superior ability to access affordable capital will continue to help them make the most of developing middle classes and business sectors.
Austerity in the developed world has created problems, and this will continue until price signals drive appropriate changes. But development around the world is solving even greater problems and those companies that focus on assisting with, and profiting from, that growth will prosper. That is good news.