Market Views

Joe Zidle: Light Summer Reading – Trends to Watch This Fall

By the time this essay hits your inbox, Byron and I will be midway through our annual Benchmark Lunches and vacation season will be in full swing. For many of us with school-aged kids, that now means the start of pick-up and drop-offs for football, soccer, and field hockey practices, i.e., a great way to spend August, said no one ever. (I kid, of course.)  

The Benchmark Lunch series is another new summer tradition for me. A gathering that started over 40 years ago with a single lunch for a small group of financial types has blossomed into four lunches on consecutive summer Fridays organized by Byron. Approximately 25 guests attend each lunch. No one—save Byron and me—attends more than one lunch in a given year. The guests now are a mix of the world’s leading investors, philanthropists, security and technology experts, and some political figures (retired mostly, and from both sides of the aisle).

We look forward to summarizing major themes from the Benchmark Lunch series in our September essay. This month, in lieu of our traditional commentary, we decided to share several graphics that illustrate long-term themes with which investors should be familiar. Some are investment-related, while others highlight issues with far-reaching implications, such as demographics and income inequality. In all cases, the trends we highlight below will be part of the conversation in this fall’s primary season and beyond.

As always, we welcome your feedback.

US Trends (Part 1): Low Rates Distorting Many Historical Relationships

The US remains overweight relative to other developed markets in our Radical Asset Allocation. However we believe that the highs for the year have been made in equity and credit risk assets. Equities and credit may correct or at least stall-out for the rest of the year due to trade risk and a Fed that fails to deliver, nevertheless we do not see a recession until the year 2021 at least. Longer term we are concerned that monetary policy may be less effective due to the low rates and record levels of debt outstanding. And many historical relationships are showing the strains of excessive liquidity.

Table 1 highlights how much GDP is produced relative to each dollar of government debt. Deficit spending over the last decade was actually fairly productive in terms of producing GDP, and better than the previous three decades. But we doubt that this relationship will remain as robust in the years ahead as the US deals with its massive deficit. The law of large numbers hurts.

Table 1: Debt Getting Less Bang For Its Buck Relative to Prior Periods(1)

Housing is critical to the economy, contributing to GDP growth, wealth accumulation and inflation. Housing markets are tight and mortgage rates are low, yet Figures 1 and 2 show new supply remains persistently low and prices are barely budging.

Figure 1: Homeowner and rental vacancy rates are at levels not seen since the 1990s and 1980s, respectively(2)

Figure 2: But rental price appreciation remains low relative to the limited supply, thus curbing inflation(3)

Figure 3 shows that low mortgage rates should be stimulating a stronger increase in new homes sold. New homes are an important variable for economic growth because the construction and sale of a new house contributes more to GDP growth than the sale of an existing home.

Figure 3: With mortgage rates near 50-year lows, single family home sales should be expected to pick up(4)

US Trends (Part 2): Inequality and Demographics Get the Spotlight

US demographics and income inequality figured prominently in the first two Democratic debates. While the stock market has provided record returns, economic growth this cycle has been weaker than any other expansion on record. As central banks responded to slow growth with monetary easing, they were able to reflate asset prices but failed to reflate the real economy. That benefited savers over workers, and in turn heightened inequality. Figure 4 illustrates how wealth has become increasingly concentrated at the top. Reflating the stock and bond markets certainly played a role in inflating the wealth of the top 10%.

Figure 4: The top 10% capturing an ever greater share of U.S. wealth(5)

Figure 5: CEOs make 312x the average worker – compared to 20x in 1965(6)

Despite the somber message on inequality, there is some good news, and it’s the US labor market. Currently, all segments of the US population are benefiting from the robust jobs market, which will help lift incomes. Figure 6 shows the difference between unemployment rates for those with college degrees and higher versus those with less than a high school diploma.

Figure 6: Strong US labor market means that the education gap in employment is shrinking(7)

It’s possible that a weak recovery was unavoidable due to demographics; for example, population growth slowed from an average of 2% annually to just 0.3% for the next decade or so. As Figure 7 shows, the US economy increasingly relies on immigration for population growth.

Figure 7: Without immigration, the US working age population would shrink dramatically over the next two decades(8)

Figure 8: Republicans are near all-time highs in consumer comfort, and Democrats are at the highest level in nearly two decades(9)

Healthcare for all? Healthcare for some? Both political parties mark healthcare as a key issue, and for good reason. The US spends more on healthcare than any other country—it’s not even close. But for all the expense, Figure 9 illustrates that US life expectancy lags other Organization for Economic Co-operation and Development (OECD) countries by a significant margin.

Figure 9: US lags other developed economies in life expectancy, despite spending vastly more on healthcare(10)

Global Trends: Emerging Markets to Lead the Way

We continue to favor emerging markets (EM) over non-US developed markets (DM). We highlight several charts on long-term demographics and growth. Many will affect financial returns in the short term. However, secular growth is simply the combination of population growth and productivity, and the outlook for both is bright in EM.

Figure 10 highlights the share of global GDP by economy type. EM became a larger share of GDP than DM a decade ago, and that trend continues.

Figure 10: EM/Developing Economies estimated to comprise 63% of global GDP by 2022(11)

Emerging markets also have the strongest population growth trends, as outlined in Figure 11. Simply put, EM generally has the fastest growth rates of prime age workers, which means that while economies like the US, Europe and Japan are turning gray, the golden years are still to come for emerging markets. Among developed economies, the US is forecast to have some of the best demographics in the year 2050, while India will be a standout among major developing countries.

Figure 11: EM economies make up the majority of the world population, and will stay younger for longer(12)

Lastly, India is a growth story that cannot be understated. Figure 12 highlights that India will be the world’s most populous country by the end of the century. India will also be responsible for 360 million of the next billion entrants into the global middle class.(13) African nations will be a force to be reckoned with as well. By 2100, they will comprise five of the top 10 largest countries by population.

Figure 12: By 2100, five of the world’s 10 largest countries are projected to be in Africa(14)

Enjoy the rest of your summer,

Blackstone Investment Strategy Team

1. Source: Federal Reserve and Ned Davis Research. Most recent data available, as of 8/1/19. Total credit market debt includes households, nonfinancial business, financial sector, federal government, state and local government and foreign sector.

2.  Source: Census Bureau and Federal Reserve, as of 6/30/19.

3.  Source: Bureau of Labor Statistics and Census Bureau, as of 6/30/19.

4.  Source: Census Bureau, Freddie Mac and Blackstone Investment Strategy, as of 6/30/19.

5.  Source: Federal Reserve Survey of Consumer Finances and Financial Accounts of the United States, as of 3/31/19. 

6.  Source: Economic Policy Institute, as of 8/16/2018. 2017 values are projected. CEO annual compensation is based on “options realized,” which includes salary, bonus, restricted stock grants, options realized and long-term incentive payouts for CEOs at the top 350 U.S. firms ranked by sales.

7.  Source: Bureau of Labor Statistics and Bloomberg, as of 6/30/19. Numbers are seasonally adjusted.

8.  Source: US Census Bureau and Pew Research Center. Working age population based on people aged 25-64. Immigration numbers are comprised of new immigrants and working age U.S.-born adults with immigrant parents. Projections are from Pew, for the period 2015-2035.

9.  Source: Bloomberg and University of Michigan Consumer Comfort Index, as of 7/31/19.

10.  Source: OECD, as of 2017 (or latest available.) Represents available data for all countries over the period 1970-2017. Recent data include estimate and provisional values.

11.  Source: International Monetary Fund. Based on IMF World Economic Outlook data, as of April 2019. GDP based on purchasing power parity. Figures for 2019 and later are forecasts.

12.  Source: International Monetary Fund and United Nations World Population Prospects: The 2017 Revision. IMF data based on the IMF World Economic Outlook report, as of April 2019. Working-age population defined as those aged 15-64.

13.  The Brookings Institution, Working Paper 100, February 2017. Middle class defined as comprising those households with per capita incomes between $10 and $100 per day in 2005 PPP terms. This implies an annual income for a four-person middle-class household of $14,600 to $146,000. 

14.  Source: United Nations World Population Prospects 2019 and Pew Research Center.

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