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.
Why?
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 50Â 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.
|
Let the Japanese “Fed” make YOU rich! Time is running out to get on board for Boris and Kathy’s fifth and final “Month of Destiny” trade for December. (Don’t worry, we have BIG plans for January, including a $73,000 payday for you). It’s a trade designed to use Tuesday’s announcement from the Bank of Japan to make you $5,000 richer in a matter of days. If that sounds outrageous, earlier this year you could have turned $10,000 into $32,794 in less than a week! But you must hurry: The deadline to receive our BOJ trade is this coming Monday, December 19 at 5:00 PM Eastern Time. |
| Internal Sponsorship |
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.
Now what?
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.
|
Economic Tidal Waves Act Just like Tsunamis 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. |
| Internal Sponsorship |
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.
Best wishes,
Bill Hall
Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.
{ 15 comments }
Your article is predicated on the McKinsey Global Institute report that paints a dire picture if productivity does not rise. The unknown, to both you and McKinsey, is what will Donald Trump do on trade – limit free trade or not. Because this issue’s posture is NOT known (and suspicion is not fact), I argue your article’s conclusion is premature & “smacks” of political posturing.
Gene; My thoughts are the same as yours. I agree. All systems are go. I plan on buying more stocks and options this year anticipating more economic growth.
Hmmm… Looking forward its rising IQ mechanical worker versus static IQ organic worker.
Static IQ organic workers are consumers and voters. (poorer and more disgruntled by the day, Hence there should be no surprise at the backlash from the polling booth.).
For productivity to advance human workers have to be replaced BUT at what social cost? (all out war? – workers versus owners of capital??)
First it was the horse and we raced away. Then it was the driver and we slept in the back seat. Then it was us …… the obsolete human.
It is the reduction of freedoms by central planners that is reducing economic output, and stifling productivity.
People around the world are rebelling against the incompetency and fraud of the establishment, which is represented by Brexit, Trump, Italy, France, and likely the Netherlands and Germany. Free trade csn be negociated between individual countries much more effectively than with blocks of self-interested career politicians.
Bill how do you short a stock? Is this a euphenism for some method of quick selling?
I do not get why ARCC has lost 8%since 12/12. The merger which was completed is not
new news and I can not find any other news which would account for drop. Are you aware of any explanation??
A very reasoned logical argument which I am more or less following ie: good dividend
paying stocks & short term bonds. also some gold/silver streaming shares anticipating a monetary collaspe that may not happen for a long time. They are down
because the US $ is up. Will the US $ continue up??
“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” This is a form of social engineering to achieve the utopian goal of social justice. It wasn’t growth in underdeveloped countries; it is redistribution of wealth by raising the standard of living in countries at the expense of those with high standard of living. Here is a post I put on a couple of Facebook sites before the election: People criticize Trump for advocating tariffs as being a protectionist. Protectionist only became a dirty word after national corporations wanted to hire cheap overseas labor. Our founding fathers realized that this country had to impose tariffs to protect our economy. Yeah, those geniuses were protectionists. Think about it, what is wrong with one trying to protect themselves, their families and their country. Protectionism has been promoted as a dirty word by the MSM because a few wealthy people want a global economy so that they can have global power. Wasn’t that what the American revolution was all about, breaking the shackles of a global power and global economy. Trump has it right. We need jobs brought back from outsourcing. Only jobs will cure this nation. Lowering taxes will not. Globalization has done more damage than Trump is addressing. The MSM tell us that people who are not working are lazy and just want to suck on government benefits. Not so. I live amongst these people. They want to work, but don’t have the power to fight globalization. When companies transfer local jobs overseas, displaced workers must depend on government benefit programs in order to survive. Our workforce participation has dropped to very low levels; dependence on government benefit programs, such as food stamps, is at an all time high. Society and the economy are intertwined, they cannot be separated. Attempts to do so will result in chaos. The government must provide some support for those displaced by globalization and free trade. The proponents of free trade will tell you that globalization has provided you cheap products which improves your standard of living. This is a bold faced lie! Globalization has only lined the pockets of the elite. Those cheap products have two costs: the direct cost at the cash register and the indirect cost of higher taxes to fund the government benefit programs for the displaced workers. The products are probably much more expensive than they would have been if they had they been manufactured locally. A second effect of globalization creating large numbers of government dependent displaced workers is a huge reduction in our tax base and our potential market for goods. The reduction in the tax base means that those working must pay their taxes along with those taxes that cannot be paid by the displaced workers. However, the bill is too large for the working population, so the government must compensate by printing and borrowing more money. Bingo! 19 trillion dollars debt. It also dooms the life of the dollar. NOTHING IN LIFE IS FREE! Globalization is destroying our country for the benefit of a few. Even those few will suffer because the earnings in the price/earnings ratio come 100% either directly or indirectly from society and society is fast losing its ability to support those earnings! Borrowing to drive the economy, as proposed by the Federal Reserve, not only kicks the can down the street, but also enhances the “bursting of bubbles”. Borrowing to drive the economy puts the economy on borrowed time. Payback is coming with a vengeance.
Ken Banks
Ken,
You have made some excellent points!
Hi Bill
There is another consideration for future growth. The world for some time has been besieged by left leaning governments. The result has been poorer global government leadership, higher debt, burgeoning bureaucracy and misapplication of investment assets. Where sharing the pie more equitably has been seen as more important than growing the pie and entitlement has been more important than work participation. Growth may well return if a groundswell change in these policies is enacted. Frustration among the poor, displaced and disheartened may well breathe new life into our existence as change unfolds.
The Feds are pointing to no more bail-outs, but they completely ignore the bail-in threats. Derivatives have been rightly described by Buffett as financial weapons of mass destruction. In a financial crisis, hedge funds come in front of savings and cash deposits for payoffs in bankruptcy. The stated need to the Feds is to sell more long term debts to raise cash to survive cash crunches. In a crash, the bonds will go down first to near nothing and the cash goes to the hedge funds.
Due to urgency, courts routinely accept the bankruptcy plans the banks lay out. The cash will quickly disappear largely overseas and become untraceable. To make the banks solvent (and fat), they exchange bank stock for the deposits and savings (bail-in). Magically the bank transforms liabilities (savings and checking accounts) into stockholder equity. Winners are the banks and the insiders. Losers are the rest of us.
Until hedge funds go to the bottom of the bankruptcy pile and too quick actions are forestalled, risks just get higher.
Dump or short stocks. Speculation and complacency are also at all-time highs.
Always Are !
USA FIRST- I LIVE HERE NOT IN THIRD WORLD COUNTRIES. REPLACE YOURSELF WITH A ROBOT AND NO PAY. YOU WOULD THEN SAY AMERICA FIRST.
Hey Bill, have you any tips on the end of the american football season and the playoffs, when are the san francisco 49ers gonna come back to the great team they were. I think american football is way more humane than rugby, at least they wear protective clothing. Rugbys not very humane when you see what happens to the players once they retire.