Population and Stock Markets

[iiro_lenkkari]

The world’s population has, broadly speaking, grown since the dawn of time. There are exceptions, of course, but in the long run, the trend is clear. The world’s population can be conveniently monitored, for example, from the website below:

Current World Population: 8,005,176,000

Population growth has undoubtedly been a major factor in the growth and returns of stock markets since the 19th century (stock exchanges existed earlier, of course). However, the population may reach its peak already during the lifetime of many of us (Population | United Nations), in a few decades.

How does this affect stock investors and returns?

This can be pondered in terms of supply and demand. One input of the production function decreases, but other inputs (capital, efficiency, technology) may compensate. What about demand? Will it gradually slow down, or will new innovations enable continuous increase in demand?

Or, are the stock markets a Ponzi scheme that always requires more people to enable continuous growth in results?

[Wappie]

Great opening! I was already planning to start a thread with a slightly broader title like “the future of capitalism” or similar, but perhaps there is less risk of drifting into politics here. It would be really interesting to read views from those more well-versed in the subject regarding very long-term development.

Most of us invest somewhat blindly in the belief that economic growth and historical stock market returns are almost a given in the future as well, at least within our own lifetimes. However, the plateauing of population growth, technological advancement, and the Earth’s physical constraints could cause interesting phenomena in the long run. Throughout history, societies have operated under very different models, so I wouldn’t take capitalism in its current form for granted, say, 150 years from now.

These very long-term trajectories might not necessarily carry much weight right now, but a 15-year-old starting passive index investing today could very well be affected if endless growth turns out not to be endless after all.

[Jukka7]

Instead of population growth, we should be talking about the increase or decrease in the number of consumers/producers—that is, the working population. This refers roughly to the 20–65 age group. For example, in the EU, this age group has been shrinking for years, even though the total population is still growing.

[Ilkka6]

The markets are pricing in the future prospects of various things every moment: If, for example, the demographic development of a municipality with net migration loss is expected to remain poor in the future, property prices will decrease. If a technology company’s competitive advantage evaporates and the technology becomes commoditized, it is reflected in that firm’s valuation.

Economic growth is also a different thing than material growth: with a modern smartphone, you can do more things than with a truckload of electronics a couple of decades ago (even if cloud services running in data centers were excluded from the comparison).

The economy is always about the interaction of supply and demand, and even if the global population were to decrease, as long as there are people, there will likely always be supply and demand for something and someone will make a profit, and as an investor, you get to think every day about what that something will be in the future.

Human wants and needs have clear limits in some areas (while you can eat too much food, you can hardly eat, for example, 3x too much), but in other areas, those limits are not in sight (thirst for knowledge, experiences, wealth, time, etc.).

[Jukka7]

@Ilkka6

Economics is always about the interaction of supply and demand, and even if the entire world’s population were to decrease, presumably as long as there are people, there will always be supply and demand for something and someone will make a profit, and as an investor, you get to think every day about what that something will be in the future.

Even if companies’ revenues and profits decline as a result of the decrease in customers and employees, it doesn’t matter because the number of people benefiting from those profits also decreases(?)

[Ilkka6]

@Jukka7

Even if companies’ revenues and profits decrease as a result of the decline in customers and employees, it doesn’t matter because the number of people benefiting from the profits also decreases(?)

At least if you play your cards right. As one example, Japan’s GDP per capita has been stagnating for 30 years and the working-age population has been in decline for just as long (the total population also turned downward ~2010), but at the same time, plenty of new innovations and success stories have emerged there—not just export-based ones, but also those operating in the domestic market. (The entire Tokyo Stock Exchange also finally reached new ATH levels recently, but a large part of that is driven by exports).

[Juurikki]

@Jukka7

Instead of population growth, we should be talking about the increase/decrease in the number of consumers/productive individuals, i.e., the working population. Roughly the 20–65 age group. For example, in the EU, this age group has been shrinking for years, even though the population is still growing.

In a consumer society, it is probably worth including the consumption of children and retirees as well, as it does create demand for listed companies. Consumption coefficients of 0.5 and 0.75? Dependency ratio analysis is then a separate matter entirely.

Ps. Calculating the number of productive people might be a bit politically incorrect these days, as it implies that wealth is generated through work.

[Jukka7]

@Juurikki

In a consumer society, it’s probably worth including the consumption of children and retirees as well, as it creates demand for listed companies. Consumption coefficients 0.5 and 0.75? Dependency ratio analysis then as a completely separate matter.

Because of that dependency ratio, you can’t calculate it like that. What a child consumes is taken away from their parents’ consumption, and a retiree’s consumption is paid for collectively from the wages of the workforce and is therefore also taken away from their consumption opportunities.

[Jukka7]

@Juurikki

Ps. Calculating the number of productive people might be a bit politically incorrect these days, as it suggests that wealth originates from work.

It does come from work, more or less directly. I suppose cryptocurrencies might be the only way to build wealth without your own or someone else’s labor?

[Juurikki]

@Jukka7

What a child consumes is away from their parents’ consumption, and a pensioner’s consumption is paid for collectively from the wages of those in work and is therefore also away from their consumption opportunities.

And if you really want to take reductionism to the extreme, you could argue that only work done in the export industry is real work, and all other work and consumption is just a cost and futilely washing each other’s laundry.

The point is, it is likely worth shedding light on the matter from the perspectives of both consumption and productive work.

[Jukka7]

@Juurikki

And if you really want to take reductionism to the extreme, you could argue that only work done in the export industry is real work, and all other work and consumption is just a cost and a pointless exercise of washing each other’s shirts.

Not quite. For example, a teacher’s work—funded by taxes paid by an export industry worker—frees that worker from teaching their own child and provides more time to focus on that export industry work.

[Juurikki]

@Jukka7

Not quite like that either.

Indeed. That’s why I started with “And if one really wants to.” It’s just that wretched reductionism spreading again, although more so elsewhere than on the Inderes forum. Once the far-left finally went quiet about it, new groups have now adopted similar rhetoric.

For your broader information, here is an excellent counter-argument against reductionism that Juurikki heard decades ago in so-called alternative circles. If all value is claimed to be created by selling goods and services abroad, and the money obtained from that then runs the idle domestic public sector and the private sector’s practice of washing each other’s shirts, then what if we broadened the scope?

What if, for starters, the EU decided to join the world’s happiest nation, Finland. Finland, expanded to the size of the EU, would then extract its money from international trade conducted with other continents.

Soon after, all the world’s democracies would join Finland. As a countermove, the same unification would happen among dictatorships. The world would be divided into two blocks: Finland = democracy, and the dictatorship = the axis of evil.

Democracy could only get rich by selling to the dictatorship, because that’s where the money allegedly comes from—namely, export revenues. But what happens when the dictatorship notices that this isn’t “wörking” and decides to join the great democracy gang, becoming part of Finland?

Where would the wealth come from then, when international trade could only be conducted with the Moon and Mars? Other places would be too far away, and near-planetary trade probably wouldn’t be very brisk due to logistics costs and certain delivery delays.

Some economic historian, like @Verneri_Pulkkinen, can tell us why the era of reductionist and foreign-trade-oriented economic thinking already ended in the 1600s/1700s.

[Jukka7]

8-year-old video from the World Bank. The relative share of the working-age population of the total population reached its peak in 2012 at 66%, and has been on a slow decline since then.

Chart: The Threat of Declining Working Age Populations | Statista

And there are the curves for the large OECD countries losing the most of their working-age population.

[Verneri_Pulkkinen]

The US TFR, or total fertility rate, has collapsed to new lows of 1.62 per woman (I wonder when this term will become gender-neutral, birth rate per child producer or something like that).

In any case, in long-term economic forecasts, population growth is one of the U.S.'s strengths vs. China, Europe, and much of the rest of the world. If the domestic birth rate collapses, or as it has collapsed, population growth must come from net migration.

If we think further ahead, will the U.S. succeed in attracting an increasing number of hands from elsewhere in the world? How long can South America, where the birth rate is also falling, provide these people? Will everyone eventually come from the populous countries of Africa? Time will tell. And how will the country’s politics evolve? Right now, immigration is a really hot topic in the United States too.

https://www.wsj.com/us-news/america-birth-rate-decline-a111d21b?mod=hp_lead_pos8

[iiro_lenkkari]

@Verneri_Pulkkinen

If the birth rate collapses, or as it has collapsed, population growth must come from net migration.

What if it doesn’t? Or why should it? It would be interesting to hear your thoughts on the impact of potential population changes on the stock markets.

[Verneri_Pulkkinen]

@iiro_lenkkari

What if it doesn’t come? Or why should it come? It would be interesting to hear your thoughts on the impact of possible changes in population on the stock markets.

This is admittedly an interesting topic. A few thoughts briefly (earnings season rush… but let’s not let work get in the way of the hobby too much. ).

“Why should it come?” I immediately revealed my attitude towards economic growth: fundamentally, it is good that it exists! It makes financing growing social expenditures much easier. An economy that does not grow easily becomes a zero-sum game: one person’s gain is always another’s loss. When the economy grows, a larger group has the opportunity to benefit from the growth.

As often stated, the economy grows when more hands work more efficiently. If we take away the second element from this growth recipe, i.e., the growth of the labor force, growth remains solely on the shoulders of productivity. As has been pointed out in many contexts, productivity growth has been subdued for one reason or another over the last decades globally and especially in Finland.

Effects on the stock market? Diverse, for sure. If economic growth ends (not the “end of history” as Fukuyama joked in the 90s, but the end of economic growth in the 2000s ), company earnings growth will presumably end. This won’t happen everywhere at the same time; instead, growth differences in global markets will be visible for decades: on average, the market will grow in India, Nigeria, and the United States, for example, while shrinking in Europe, China… almost everywhere eventually.

Growth is a component of value. Thus, company values could be expected to fall as the share of growth in the present value fades. In theory, a company that does not grow deserves a so-called “bulk multiple,” which is simply 1 / investor’s required return. If it is 10%, a P/E of 10x is the new normal.

But what is the required return? In zero growth, one might think it would be low. On the other hand, if a shrinking labor force drives wages and inflation up, it could even be high. However, interest rates cannot be higher than economic growth in the long run, at least in real terms… Thus, the real interest rate should be expected to be negative, regardless of the inflation picture.

I cannot predict. But I can prepare. So, I wouldn’t agree to pay too much for companies on the assumption that the required return collapses as it did for various reasons in the late 2010s and early 2020s. Labor-intensive sectors that already have a talent shortage? Yuck.

We cannot predict technological development, and that’s also why all forecasting eventually misses the mark quite a bit. It would be safe to extrapolate current development, meaning productivity growth continues to crawl. What if the global economy accelerates as the streets swarm with Tesla’s Optimus robots, Amazon’s airship drone carriers, and humanity reproduces artificially on Mars? The further ahead you look, the more scenarios (imaginable) are possible.

[Jukka7]

@Verneri_Pulkkinen

Looking further ahead, will the USA succeed in attracting an increasing number of workers from the rest of the world?

Additionally, they should consider how to get the workers already in the country into the labor market. This particularly concerns men. Increasingly, they are either failing to enter the workforce or are dropping out before retirement age and cannot get back in.

Why Are Some Prime-Age Men are Out of Work? | Bipartisan Policy Center

“For men aged 25-54 in particular, BLS data shows that the participation rate has declined from a high of 98% in September 1954 to 89% in January 2024.”

The same naturally applies to Finland as well. There are more unemployed men than women.
Employment Bulletin March 2024 (temtyollisyyskatsaus.fi)
“Of the unemployed jobseekers, 175,200 (61%) were men and 110,900 (39%) were women.”

[Jukka7]

There probably won’t be a single “documentary” about South Korea anymore that doesn’t mention the low birth rate and demographic trends as a cause for one problem or another. Here is one recent example.

[Verneri_Pulkkinen]

A good and comprehensive look in the WSJ (if you can access it) at the sudden global collapse in birth rates.

https://www.wsj.com/world/birthrates-global-decline-cause-ddaf8be2?mod=hp_lead_pos7

Quoting a few charts here:

The article also has good highlights on how culture and norms regarding a life with children have changed. Previously, there was a basic assumption and strong pressure to have offspring because they were everywhere. That’s no longer the case, and the new norm may soon be not having them at all. These things are difficult to change quickly.

Of course, when considering the environmental impact etc. caused by us humans, there is a quite shiny silver lining in this cloud. But societies’ adaptation will also be difficult, as pension systems and the like have been built on the assumption of continued population growth.

[Jukka7]

Before a low birth rate begins to show in population figures, it has time to affect many industries. Baby supplies, food, toys, schools and educational materials, the gaming and entertainment industries, etc., have already begun to undergo a transformation. I have personally noticed toy departments in stores getting smaller.
On the other hand, other sectors are still growing as the bulges in the population pyramid move upward. For example, in Japan, more adult diapers are sold than baby diapers. But in time, that too will inevitably turn into a decline unless we learn how to keep people alive even longer.