This past weekend marked another Earth Day, the 47th anniversary since the first in 1970. We had fun reading all the “spectacularly incorrect predictions” from that inaugural.
Why do we care about Earth Day on a blog relating to financial matters? Believe it or not, there is a connection. Among the many spectacularly incorrect predictions were those concerning the deadly result of “population growth,” seen as a great plague at that time. Which made us think about population growth – or rather, the lack of it – which today is now often described as the death knell for Western democracies.
Leaving aside the public policy impacts, what does declining population growth actually mean for GDP and economic activity? Not much it turns out. Thankfully our friend Don Luskin from Trend Macro (http://www.trendmacro.com) has already explored this issue in detail. In a piece called “The Demographics Myth,” Luskin makes a series of interesting points about the impact of demographics on economic activity which are crudely summarized thusly: an aging population has been a trivial factor in explaining the recent low level of economic growth and it will be equally trivial in explaining any recovery from it.
More importantly, Luskin makes a point that we believe hasn’t gotten nearly enough attention: the secular stagnation we’ve seen since 2001 is (a) not the new normal; (b) likely the result of risk aversion brought on by global trade deals and exogenous shocks like 9/11 and a sharp increase in oil prices; and (c) most importantly, eminently reversible. In short, stagnation is partly metaphysical. Here it’s worth quoting Luskin directly:
“the ‘turning’ toward risk aversion was, in part, triggered by a global ‘trade shock’ after China joined the World Trade Organization in December 2001. We don’t deny that trade globalization has created many superlative opportunities. But there have been both winners and losers – on a massive scale, and compressed into a short time period. Such a shock and its attendant disorientations and uncertainties have surely contributed to an era of risk-aversion.”
Exactly. Had you followed the bankruptcy arcs in the high yield market you’d see his point immediately. It is hard to argue with Luskin (and the President) when he says “it will be salutary to have a political environment that taps the brakes a little bit on what has been an overdose of globalization, to buy a little more time to adapt to the shock.”
Seriously, he makes another 15 or 20 good points, too many to list here, so get the report. It is well worth it. Most importantly, he notes that these shocks are mostly behind us now, and therefore the “animal spirits” so frequently mentioned today are representative of society embracing risk.
Which is really the point. GDP growth has never been a direct driver of earnings, and the correlation between stock prices and GDP has always been low, stocks being a leading indicator obviously. But, GDP growth does sustain a bull market, and GDP growth, as Luskin subtly points out, needs a positive national attitude. The optimism of the Reagan years, following the desultory reign of Jimmy Carter, clearly contributed to economic growth as much as policy. Winning is not a bad thing.