That is, you aren't getting a positive expected return because population growth is increasing over time (i.e., everyone knows that, it is already baked into the price). Now, if the expected population growth changes...then the price would change.
You have an expected return because you are taking on risk.
You’re both right. The equity risk premium [1] is real. But it’s a premium over something. That something is, approximately, production. (It’s precisely the risk-free rate of return. Which, in the long run, is base-rate production.)
[1] https://www.investopedia.com/terms/e/equityriskpremium.asp
Having said that, if you wanted a return strictly on base-rate production, then you'd invest then in risk free assets (vs equities).
Based on your name I bet you work in research at a hedge fund.
I hate to break it to you but ask most people who are price setters what their discount is and they’ll say 10% regardless of 10Y treasury yields (since you know, TINA)
As a result securities are increasingly priced on liquidity more than cash flows and that’s a function of the credit cycle way more than it’s a function of productivity.
It’s a weird post modern approach to the economy, but hey that’s showbiz baby.
A large amount of corporate profit growth since the 80s has been due to a declining share of labor compensation vs capital and declining effective tax rates. Productivity gains are the only real “free lunch” which is what capital investment is supposed to provide to justify the gains. Productivity growth has been stagnating for a couple of decades.
It feels very weird that the same:
1. US government (which bailed out some big banks when they did all of that corrupt greedy stuffy during the '07 housing collapse) 2. the predatory banks themselves 3. institutions like Vanguard, Blackrock, UBS
really let "the small guy" win in the "retail investor" by allowing us to just click "buy" on things like index funds. it all seems too good to be true. when does the little guy ever actually win?
I have a dumb question. Most publicly traded companies rarely issue new shares. Why does a company care about its share price? If we are being rewarded for buying and holding their shares based on the growth a company makes quarterly, how does the company benefit from their share price going up? They don't commonly take loans against their shares or issue new shares. I know they have a duty to shareholders but... take Facebook for example. Who cares if their stock is down 60%? How does it affect the companies financials?
You don't actually need a separate "fiduciary duty". It comes from the shareholders themselves. If the shareholders are happy with a company has motivations other than maximizing profit, they can.
There's even a legal category for that: Public Benefit Corporation. Some of them are publicly traded -- like Warby Parker. Public Benefit Corporations are somewhat protected from shareholders forcing them to pursue profits, which will hurt the stock price, but investors can value the stock based on the benefit they perceive the company to be doing. (Like Warby Parker giving away free glasses to poor people.)
For regular companies, the executives try to make the line go up because if they don't, they'll lose their jobs.
False, most public companies have stock based compensation plans, which are ways of issuing new shares. Without them, they would need to substitute stock compensation with cash to acquire talent.
Facebook issues shares every time they approve a new stock based compensation plan.
FB has 2.3b shares outstanding. How much has that number grown past 12 months, 24 months, 36 months so I can put what you are discussing into perspective?
In terms of new issuance, FB spends billions in stock based compensation each year since 2012, all of these are new issuance under the equity incentive plan. It was ~$9.164B for FY2021 alone.
In terms of buybacks, FB started buying back stocks in 2017 and has continued since. In FY2021, they spent ~$55.47B to buy back stocks.
Therefore, outstanding shares have been decreasing since around 2020. But this doesn't mean the company stops issuing shares. The more stock prices fall, the more equity they would need to issue to compete for talent, or alternatively supplement with cash. Long term, stock prices is one of many measures of how the company would be able to raise capital (stock based compensation is an indirect way of raising capital).
Data from Bloomberg: https://postimg.cc/Lq0sNCJV
If a company doesn't care about share price, the shareholders will elect a board of directors who will install a management team that does care about share price.
Executives who don't worry about share price get to work somewhere else.
Since the executives and the board decide what a company does, it's absurd to ignore them.
I get that you have a model of companies that isn't consistent with how companies behave. That mismatch tells you that your model is wrong.
It isn't reality's job to explain itself in terms that you choose.
Your model doesn't account for all relevant facts, such as the interests of stock-holders.
Shares of stock represent ownership in a company. If the company performs well and earns increasing amounts of money over time, that means the company is more valuable.
If the number of shares remain static, increasing earnings means the value of the company is higher on a per share basis and justifies a higher price per share. The company performance drives the stock price.
If I own stock in a company whose executives do not work to keep the stock price up or even increasing, I will replace those executives with executives who will work to keep the stock price up/increasing. (Corollary - I will not buy stock in a company whose executives are unconcerned with stock price. That unwillingness means that folks who own stock and might want to sell it to folks like me will "encourage" executives to make that possible.)
Is it really hard to understand that stockholders care about stock prices and that they will "encourage" the company to maintain/increase the value of their investment?
Would you buy stock in a company that didn't try to maintain/increase the stock price? Why?
This has nothing to do with bank financing or further stock sales by the company, although those can also be factors.
People don't want to risk investing without expected gain. But the risk is not causing growth.
I don’t think it’s possible to forecast economics on those scales. If I was cryonically preserved and woken up in 2122, I would be equally willing to believe we were declining or stagnant for the reasons you give… or that we had solved AI and von Neumann replicators and that the planet Mercury had been fully dismantled and used to construct a Dyson swarm whose descendants had already done the same to a similar planet around each of the nearest dozen or so stars.
At least I'd know I have a job waiting for me, supporting "legacy" code still running in production.
In the Dyson swarm scenario, assuming constant population, the productive capacity per person is 2500 times higher than the current global output, and a random act of rounding-error charity would give you more than Musk, Bezos, Zuckerberg combined, and it won’t matter if you have nothing (unless your sense of self worth exists only by the size of your bank account).
In the stagnant scenario, you might be OK with property, if you can be sure it will be maintained in the meanwhile.
In a decay scenario, I wouldn’t even want to guess what’s resilient, but houses will be fairly redundant due to oversupply.
But those scenarios were deliberately chosen as illustrative outliers; there are options between them, and I would do no better with making the right choices there — a limited AI that makes one sector redundant would destroy any investment I made in that sector while also making the output of that sector too cheap to bill separately, much as digital computers have done to the human profession of “computer”.
Similarly, the current flatlining (ignoring the decrease due to excess deaths) of the population won't effect actual production until a couple of decades on, unless you count possibly increased production described above.
That age group is involved in production (e.g., in media.)
But not lot, so, yes, the narrow first-order GDP effect would be very small.
> With a second approximation, you might say that GDP would increase since parental childcare is not part of the GDP and those parents could instead be adding to the GDP.
I suspect second order demand side effects would probably be more strongly negative that second order supply side effects would be positive. You can't predict GDP effects from labor supply side effects alone.
Eventually though the benefit disappears as the demographic pyramid becomes a pipe and the share of working population shrinks again. The US demographic dividend was the era of the baby boomers who were a large cohort but had relatively few children.
On average there is a strong correlation between the two globally and there has been during the entire post WW2 era at the least. It is the rare outlier that doesn't see a correlation between societal well-being and GDP per capita.
Shall we stroll down the list of high GDP nations? Surely it's unnecessary, as we all know the names. Oh ok let's do it anyway.
Ireland $101k | Norway $99k | Switzerland $96k | Qatar $84k | Brunei $80k | Singapore $79k | US $76k | Iceland $74k | Denmark $68k | Australia $67k | Sweden $58k | Netherlands $57k | Canada $57k | Israel $54k | Finland $53k | Austria $53k | Belgium $52k | Germany $51k | New Zealand $50k | UAE $50k | UK $50k | France $44k | Japan $39k | Kuwait $39k | Taiwan $36k | South Korea $35k | and so on
And everyone also knows what the bottom 1/4 or 1/3 of GDP per capita nations look like and how horrible their societal well-being is. The correlation is blatant. It's not perfect of course, it is however very high.
There are no great societal paradises where the GDP per capita is ~$500-$5,000. And there are no countries that are like Zimbabwe, Somalia or North Korea but have $30k+ GDP per capita figures.
The only serious weak spots in the correlation, primarily, are the US being ranked so highly on GDP per capita (but being below eg Finland on societal well-being), and the couple of smaller resource rich nations like Qatar where human rights are weak. For the vast majority of nations the correlation is quite sound and consistently so.
Still I agree that between top and bottom there is huge qualitative differences.
Ok, not paradise, but a counterpoint I can think of might be Bhutan at around $3,200.
Probably the same as today. Big tech will do well: google, tesla, amazon, etc. The wealthy and B2B will continue to provide a growing share of economic value, outpacing retail consumers and compensating for population stagnation. I don't see any reason for productivity to fall. Productivity surged during pandemic.
The good news is, this won't happen in the US, at least not in the 21st century. So if you're an American, feel lucky.
(1) We border a rapidly developing nation to the south (Mexico), with significant economic ties at that border.
(2) The United States is, hands down, the most effective society at integrating immigrants and allowing them to be productive. We can always, always import more workers, and people will always, always want to come here.
I think nominal GDP targeting is pretty bad policy though. Deflation can be a great thing for people, if its focused in the right areas.
e.g. imagine population is cut in half overnight... suddenly housing becomes very cheap and affordable, even in previously desirable areas. Of course, need to deal with all the ramifications and second order effects of that (lots of financial instruments would implode as their inflationary baseline assumptions unravel).
Debt instruments of all kind become problematic with deflation. At least in their current form.
Fortunately the US could toggle on population growth on a whim through changes in immigration policy
Only if accompanied with a negative interest rate so that the real interest rate is 0%. The problem with deflation is that it raises the real interest rate, even though nobody signed a contract "hey if deflation is 5% I will willingly pay a real interest rate of 5%". When you consider that deflation primarily happens in economies that don't need further growth, paying that interest rate is not good for society.
Most certainly. We'll very clearly do it with robots and artificial intelligence. Although people are expecting way too much way too soon. The classic line about how people overestimate change in the short-term and underestimate change in the long-term.
Elon Musk may occasionally be a clown in his behavior, but he has persistently been out on the cutting edge where newer technology meets real-world usefulness (the point where technology is ready for mass adoption; an awareness Steve Jobs also had). That's why Musk & Tesla are so interested in robotics (and they have the cashflow now to easily afford to pursue it in a big way). It will be a very large market, 30 years out, and it'll do a lot for boosting per capita productivity while population declines or stagnates.
For example we might see a scenario where population declines in the affluent nations, with persistent aging, and productivity remains stable or even gains, thanks to all manner of human labor enhancements that we'll come up with in this looming era.
Musk is in the process of tying most of his free cash up in a web app instead of investing it in his businesses which might cause those larger companies to have issues.
And I'm not sure where your premise matters re what I said. Tesla is the entity in question with the booming free cash to spend from operations, as their business has become soundly profitable. If Musk leverages his enormous net worth on acquiring profitable Twitter - what does that have to do with Tesla's ability to direct its operational cash to robotics R&D? Maybe his focus being split further will increase the risk to Tesla's profitability over time, however you didn't suggest that (and maybe Tesla would be better off with a Gwynne Shotwell operating it anyway; a more distracted Musk that has to hire a superior operator might bolster Tesla).
With $3.6b in operating income last quarter, and $9.6b over the last four quarters, Tesla increasingly has huge resources to throw at big R&D programs. Which has little to nothing to do with Musk's personal finances.
So far Tesla Robotics hasn't shown much to make anyone think they are serious about it. He needs to run his companies like an adult and stop doing stupid stunts for attention and taking stupid risks like smoking drugs one of your most, if not the most, profitable customer says are illegal on camera.
You’re missing an critical component from the Solow model.
Japan is an excellent case of when labor population has declined/stagnated since 1990s.
Perhaps you can pick two of three: a stagnant economy, low immigration, non-right-wing politics. Japan picks a stagnant economy and low immigration (Shinzo Abe though a nationalist was no Marine Le Pen). France picks a somewhat growing economy and somewhat high immigration, and suffers from the growth of right-wing anti-immigrant parties (Marine Le Pen won 40% of the vote recently).
France population 1990: 58 million | France population today: 67 million
France GDP 1990: $1.2 trillion | France GDP today: $2.9 trillion ($1.2t inflation adjusted forward 32 years is $2.7 trillion)
They gained 15-16% in population, and gained 6-7% in GDP. A big net drop per capita over such a duration, particularly for a major affluent economy.
And if one wants to be more aggressive about how big of a failure their immigration program has been, the French economy has net contracted in real terms over the last 15 years. GDP was $2.9t at the peak in 2008, and it's still there now; except to just remain steady, it needed to climb to nearly $4 trillion to adjust for inflation. So France has gained 5% in population over ~15 years, and is missing a trillion dollars in GDP they should have just to remain flat (ie they've seen a massive per capita economic contraction over those 15 years).
One might claim the decline in France would have been even worse without their hefty immigration policies. Likely a false claim given the very high unemployment rate among immigrants in France over the past two decades. The French approach to mass immigration has been a disaster (while other better controlled examples have been great successes, as in Canada). Skilled immigration is vastly better than low-skill mass immigration, especially going into the era of basic human labor coming under attack by the field of productivity robotics. It's a far better approach to focus on improving your nation per capita net via attracting highly skilled labor, in terms of productivity and incomes, than just focusing on getting as much raw immigration as you can. That's the core failure of the French approach.
It's far better to be rich Canada, with a flat to very modestly increasing population, in which real per capita GDP keeps rising and they keep focused on adding high skill labor (which makes their country richer and richer over time), than to be an declining France that throws low skill labor at the problem. For one thing, the high skilled labor immediately begins contributing to the tax base in a big way, which is critical for an affluent welfare state; whereas a tilt toward low skilled labor + a welfare state is a recipe for fiscal disaster.
US GDP per capita is on track to reach a doubling of the French GDP per capita, plausibly this decade ($76k vs $44k now and the gap keeps widening year after year). Meanwhile Canada is also now up to $57k (France and Canada were nearly the same on GDP per capita in 2008, now there is a $13k gap), so they're increasingly leaving France behind as well.
https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locat...
The bigger question is whether you put much stock into PPP. I personally don't, I consider it a very weak economic metric, poorly constructed and poorly tracked. There are is no economist army traversing the globe every year and actually accurately tracking PPP nation by nation (every nation and to the great depth required); nobody does that, they slap giant guesses on it year after year, trying to extrapolate from a small basket of signals in a given country, and starting from the base GDP figures. PPP pretends that Puerto Rico is above Portugal (and nearly on par with Spain or Estonia), Russia is on par with Greece, and China is on par with Botswana. It's a bad, unreliable joke.
I think in place of PPP, it's almost always better to do a deep dive on a given country on its various quality of life metrics, even though those are also at times difficult to compare nation to nation (due to variances in how each country measures).
For example, I don't think it's difficult to show that Finland has a comparable or higher quality of life than the US (I believe it's solidly higher personally, particularly at the median or lower), despite the $20k GDP per capita gap. The US is typically used as the base for PPP, so starting at $76k for the US, you then have Canada and Finland at $58k and $57k on PPP - do I really believe there is such a gap between the US and those two on PPP? I'd be very skeptical, it's another case where PPP doesn't do a very good job.
In most countries the population has already started collapsing
https://en.wikipedia.org/wiki/List_of_countries_by_populatio...
GDP ~= Population * Productivity
If your population growth flat-lines (which it did last year), productivity has to compensate.
Can productivity compensate if the average age is getting older (people tend to be less productive after a certain median age)?
One reason investing in index funds makes sense is the underlying assumption that global population growth keeps increasing (GDP for ‘free’).
I’m super interested in what investing looks like in 50-100 years as the population starts collapsing, because it might collapse faster than productivity can possibly compensate for, which means unstoppable GDP decline.
GDP has to be at certain levels to support different types of economic activity. E.g. at some point, GDP might be low enough that new semiconductor research isn’t affordable (because all the workers are used up caring for the elderly for example).