Investors with time horizons of more than a decade should prioritize historical economic implications when determining portfolio allocation. Inflation ebbs and flows, business cycles cycle, monetary policy reacts, and fiscal policy does whatever the prevailing hot air tells it to do. You'll probably see a downturn at least once before you're ready to cash in, and your portfolio depends upon a recovery. This makes it vital to understand historical, economic implications that foreshadow changes in economic growth.
Factors related to the overwhelming economic growth the world has experienced since the end of the 16th century have not changed. Events like the agricultural revolution, the enlightenment, the industrial revolution, and the resulting transcontinental movement of people have all contributed to the economic historian's perspective on economic growth. Government involved itself to fine-tune the economic environment, reinforcing the simple, systemic components western democracies, today. Over the following three centuries, economic growth was unprecedented. Through business cycles, through revolutions, and through monetary policy evolution, the fertility rate and population growth was a force for economic expansion.
A combination of changing political demographics, financial vitality, and shifts in reproduction preferences suggests a time where investors should understand the importance of the fertility rate and population growth to avoid a long-term contraction. Neglecting historical realities pushes the world economy down a road unseen since the 16th century and may increase the risk profile of your portfolio.
Fertility And Population: The Foundation Of Economic Trends
The first half of the previous millennium is characterized by a lack of long-term economic growth and population cycles known as the Malthusian Trap. The second half is defined by economic revolutions, economic growth, and education. The 17th century economy was agrarian, a unique intersection of economics and nature, the essence of the theory with which Malthus is credited.
Source: University of Minnesota
The Malthusian Trap is the point at which the stagnant agriculture production could not support the population, a sort of natural over-population. Production beneath the necessary subsistence level caused a decline in fertility, and once fertility declined to where agriculture could support it again, the population began to over-expand once more.
This Trap went largely unchanged until the end of the century, when those in power sought a means of sustained wealth generation. To combat the Trap, agriculture-friendly policies were implemented to induce sustainable growth in agriculture production, which supported the expansion of population. The initial, long-term economic growth experienced is known as the agricultural revolution. The most pivotal idea was eliminating common rights (enforcement of property rights), in the 16th century - a foundational principle of society, today. Confirmed by Adam Smith in The Wealth of Nations, it allowed for individuals to take risks, to innovate, increasing agricultural production efficiencies. For example, property rights restricted the ability to graze cattle anywhere, increasing sustainability of agriculture such as beans and what's used to make breads. This evidence plays right into sustainable economic theories on the collective action problem - but that's another subject.
Indicative in the chart above is a clear inflection point near the beginning of the 18th century (c. 1700), the beginning of the agricultural revolution. The Malthusian Trap was avoided. Population growth was supported by growth in agriculture. While population grew and innovation existed, Gregory Clark suggests that everyone was not getting wealthier in A Farewell to Alms. The concentration of wealth and a growing population created a middle class, which enabled a larger population of non-business owners. This new class of people needed jobs - people moved to economic centers looking for work.
To avoid a more overwhelmingly drawn out recap of the Industrial Revolution, I'll just hit some main points.
Urbanization and the expanse of industry resulted in many things, including a higher velocity of capital, earnings growth, and resource expansion. The interesting effects of this rapid expansion of technology and productivity relate to both population and government. Jobs were plentiful, and employment was essential to survival, so much so that children worked. Adults were too large to fit behind industrial equipment for cleaning, or to fix jams in smaller machines. Little public health knowledge resulted in vastly polluted urban environments. Despite the tepid conditions and resulting infant mortality, people kept attempting reproduction. There was plenty of labor to go around - plenty of innovations needing built. Of course, this resulted in an aggregate appreciation in wealth, but also stressed the income inequality.
When the New World was discovered, income inequality encouraged laborers to seek improved lives and increased wealth outside of industrialized Europe. The boats permitting intercontinental migration became the transportation nightmare most common folk exaggerate over on airplanes. The capitalistic strive for profit and neglectful strife in Europe presented an equilibrium of need and unholy conditions. The population was threatened simply because migration was so antithetical to health; but new jobs and tighter labor markets are necessary to combat income inequality. This oxymoronic state of the world led to government intervention that inhibited the unregulated expansion of industry for the welfare of the people. It allowed increased survival during the journey over, and more fit laborers upon arrival. It also spawned the early renditions of developed nations' welfare systems, a sort of social security administered in Germany. After all, we learned from the agricultural revolution that it wasn't just about population growth but about population survival. To maintain growth, survival must be improved.
Developed nations have a modern society allowing the aggregate to thrive, expand income, productive capacity, and health. These have all led us down the prosperous road largely accredited to capitalist principles, not to mention a few government interventions. This assessment ignores the population factor.
In the 20th century, women entering the workforce encouraged economic growth. First, as an economic necessity (WWI), and then to encourage such behavior thereafter. We expanded the labor market and the productive capacity. Education and job training expanded to these women, and the economy was breaking out of the self-inhibited chains of a male-reliant labor force.
Initially manufactured in the 1960s, and mainstream in the 1980s, reliable contraception enabled women to control their future, their lives, and their careers. In a still-highly-patriarchal society, the human race could endure its biological urge to procreate - only ending in actual childcare with absolute discretion. This led to delays in marriage, delays in childrearing, emphasizing the desire to pursue careers, emphasizing the necessity of economic expansion - what you and your portfolio rely on. Notice the effect on the fertility rate:
I present the baby bust. Although the population growth rate and fertility rate recovered some leading into 1990, the dedication to work led us to the information age we live in now.
This period of economic history has little to do with survival, health, or productive capacity. We've figured out the survival bit through advances in healthcare and the over-supply and sustenance of agricultural productivity. Productivity can be supplemented by technology. The only thing left to ensure is a growing labor force and a growing consumer population.
Current Population Growth
Data from Pew suggests that we've seen all-time-low birth rates before by three different measures of fertility. Most recently, the general fertility rate was used to determine our all-time low. It is a sample to total the amount of births per 1,000 women of childbearing age (15-44). In 2016, there were 62 births per 1,000 women.
The first two times, 1976 and 2006, were shortly followed by recessions in 1980 and 2008. Who's to say that this time is different? According to Pew, the recent method demonstrated the baby boom and the following baby bust. It also shows the rise into 2006 and the decline ever after. Generally, the birth rate and the economy have a positive correlation. While intuitive, causation may not be what you expect, as this MarketWatch article may lead one to believe.
The remainder of my article is expressed via the total fertility rate, as it has shown similar trends to the general rate and is the most common. The chart above shows the fiscal crises that are correlated with trends in fertility. Maybe the correlation of the Energy Crisis and the rise of Birth Control was a coincidence. Regardless, the fertility rate has never quite recovered. The end of that chart is provided by the World Bank below:
Domestic birth rates have fallen below the 2.0 replacement rate for the 9th straight year, as shown in the chart above and according to the CDC. One can brainstorm many factors preventing population growth. For instance, student loans may take priority over family planning and home ownership. Starter homes are more expensive now than before. Net wealth of those aged 15-34 is lower than Baby Boomers' at the same age. Although aggregate wealth may better over the long term, that also means delays to marriage and fertility. Consumer preferences may contribute to the situation. Prioritizing the careers of both spouses makes time away from family planning factors such as the cost of child care and time spent working. Whatever the causes, it's the economic environment in with which investors have to work.
The chart below is the S&P 500. The blue line indicates the last time the U.S. fertility rate was above the replacement rate. The purple line denotes the beginning of Quantitative Easing. Note from the prior section that two of our three fertility rate measures concluded that the blue line also indicates that the fertility rate declined ever after. This may not indicate that this growth is unwarranted. After all, economic history shows regulating authorities stepping in to ensure economic and population growth alike. Perhaps the U.S. sees population growth and fertility rate increases over the next decade.
Quick side note: population growth hit a new low post-contraception boom in 2001.
Alas, common rhetoric today is acknowledging what has historically happened when population growth is not sufficient to bolster economic growth: a regulating authority steps in. The levels the U.S. market has achieved is frequently credited to economic intervention. Artificially cheap debt for capital investment has also financed buybacks, resulting in corporate repurchases being the biggest demand driver for stocks.
Since there was a recession there, I'm not sure the U.S. is the best example. However, a comparison might be helpful. Japan realized its population problem sorely late into the trend. After the Energy Crisis, the United States saw the birth rate increase slightly, holding near the replacement rate. However, Japan's birth rate declined thereafter to levels well below replacement.
Compare this to the Nikkei (below), and note the dates on the X-axis.
A recession began around 1990, a few years after the fertility growth declined. Rates rose to stem a prolonged period of speculative growth, over-correcting in the process. Soon after, the Bank of Japan lowered rates to near zero and bailed out financial institutions. These moves are similar to the U.S.'s moves to revive itself from the Great Recession two decades later. Unfortunately, it did not improve the Japanese economy. The lack of recovery has become known as The Lost Decade, or The Lost Score, to account for the lack of recovery through the Great Recession. The helpfulness of this comparison comes circa 2005. While there is a slight inflection point in Japan's birth rate and a similar move in the stock market, the Great Recession interrupts any compelling relationship. The red line in the Nikkei chart above denotes the initiation of Shinzoo Abe's Abenomics, famous for negative interest rates and helicopter money. While this may have had the desired effects of sparking a sluggish economy, the fertility rate is not all that needs to be analyzed. Net population growth is vital to sustaining an economy. Net population growth includes births but can account for immigration and migration, or the general movement of people.
In the chart above is of both countries' population growth. Notice that Japan's population growth is 0% c. 2005, even negative later on, despite an increasing fertility rate. This indicates that Japan had a net outflow of people. For instance, migration to other countries or mortality, a result of a fertility rate below replacement.
Together, the trends reveal evidence that economic vitality hinders on fertility near or above the replacement rate and perpetual population growth. In both cases, attempts were made to right ailing economies through similar monetary policy moves. What is apparent is that, despite the success in America, the same policy changes did not right the ship in Japan. Japan attempted the monetary policy moves during a period of much slower population growth and fertility below the replacement rate. In the U.S., fertility was near the replacement rate, and the population grew faster. The demographic trends are the common denominator.
Implications To Your Investments
All is not lost. Despite the overwhelming negativity, this is no bearish article. Simply, this article encourages an alternative focal point for the buy-and-hold investor with a long-term perspective. If you're looking for a timeline, it took Japan 22 years to get from the population growth the U.S. has today to 0. Going forward, I will look at economies with higher population growth rates and economic stability. Some countries that fit such a criteria are Luxembourg, Ireland, New Zealand, and Israel. History shows us that these would be much safer bets than any economy with a declining population.
Fortunately, remedies have been tested. Increased immigration helps population growth. For instance, Germany is depending on migration to spur population growth.
Some European countries like Norway and the UK are finding success in raising fertility and population rates. It may be difficult to determine what exactly improved population, but perhaps the generous paid leave and universal health care that politically characterize the countries are a factor.
Technology-focused countries with lower population growth rates may also suffice. Technology's ability to replace workers may permit productivity to be shifted toward primary and highly productive functions. It may permit more efficient productivity, which may be the way the market improves time for family planning. However, it may also come with labor displacement.
If technology is to make up the U.S. population slowdown, makers of AI, software, chips, equipment manufacturers, cloud providers, and digital security companies should all do quite well. Services that might benefit from the government prioritizing population-growing incentives might benefit. For instance, education, lower-cost healthcare services, government property REITs, student housing REITs, and mortgage REITs may provide opportunities. Retail may make more of a comeback as burdensome costs on lower-income people are relieved through socialized medicine or improved child care and insurance prospects are provided.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.