On Wednesday, Federal Reserve Chair Janet Yellen said she will move carefully as she decides when to lift short-term interest rates again as the U.S. central bank assesses whether the economic recovery remains on track and whether the job market is still improving.
In her cautious statement, Ms. Yellen said that she had “considerable uncertainty” about the U.S. economic outlook, singling out weaker hiring numbers and soft investment as evidence of some of the risks that remain on the horizon.
That’s because the U.K.’s Brexit referendum — combined with the election of Donald Trump — could spell double trouble as the global economy faces longer-term doubts over the likely pace of productivity growth.
Why is this important and what does it mean for your portfolio?
Over the past 50 years, global economic growth has been exceptionally rapid. Indeed, the world economy expanded six-fold. Average per capita income almost tripled and hundreds of millions of people were lifted out of poverty.
As the chart below shows, over the past half-century, global GDP has grown at a compound annual rate of 3.8 percent, an exceptionally rapid rate compared with growth rates prior to the mid-20th century. That’s because factors such as improved hygiene, advances in medicine, access to health care, and a reduction in war casualties contributed to record rates of population growth in many developed and emerging economies.
Yet unless we can dramatically improve global productivity (which was Yellen’s primary concern in her statement on Wednesday), the next half-century will look very different. The rapid expansion of the past five decades will be seen as an aberration of history, with the U.S. and world economy sliding back to a relatively sluggish long-term growth rate.
The problem is that slower population growth and longer life expectancy are limiting growth in the working-age population in the U.S. and around the world. For the past half-century, the twin engines of rapid population growth (expanding the number of workers) and a brisk increase in labor productivity powered the expansion of gross domestic product across the globe. But this big demographic tailwind is weakening and even becoming a headwind in many countries.
Can an increase in productivity save the day in an aging world?
According to the McKinsey Global Institute, productivity would have to increase 80 percent faster than its average rate during the past half-century to compensate fully for slower employment growth. Yes, you read that right: That’s 80% faster than during the past 50 years — indeed a high hurdle to cross.
And that’s before factoring in the protectionist policies of Brexit and the uncertainty around Trump’s views on global trade.
Consider this: Over the past 50 years, one of the driving forces propelling global GDP growth was the integration of the world’s trade markets spurred on by the widespread adoption of free trade agreements, first between developed economies and later with emerging regions.
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Before Brexit and President-elect Trump, the world’s central bankers and policymakers were relying on the continued reduction of trade barriers in manufacturing, more open policies toward foreign direct investment and a more consistent approach to regulation as catalysts to advance the world economically.
The truthful answer is that no one knows for sure because the world is a complex place. And it’s obviously impossible to predict how Brexit will play out and what will remain of Trump’s policies after they move through the U.S. Congress.
But what we do know is that the cost of isolation can be high, and there’s a strong scent of uncertainty in the air. And for the markets, uncertainty means volatility — and the higher the uncertainty, the more volatility.
According to the National Geographic, the enormous energy of a tsunami can lift giant boulders, flip vehicles and demolish houses. But from a financial standpoint, the K Wave will be even worse: Millions could lose their homes. Millions more could see their lifesavings wiped out in an instant. Businesses, large and small, could close their doors. Even the bare necessities of life — food, water, clothing — might become scarce. That’s why it’s so important that you get your free copy of “STOCK MARKET TSUNAMI” right away, click here to download now! – Larry Edelson.
Therefore, with the U.S. stock market trading close to all-time highs and valuations stretched across the board, I continue to recommend that it’s not the time to be filling up your boots with risk. And if you do own equities, make sure they are high quality, dividend paying, highly liquid and have a global distribution platform that can power forward in a slow growth world. These companies are rare, but many are hidden in plain sight. You just need to know where to look. And for your bond portfolio, make sure your holdings are high-quality too, with a short duration.
Keep an eye out for my future articles in which I’ll reveal the U.S. GDP growth rate that’s required to reach escape velocity from our current debt burden and that will get us back on the growth track. I’ll also explain how the world’s central banks’ primary monetary policy is based on a scheme borrowed from a popular, yet dangerous, wagering strategy that professional gamblers have been using for years.