Why are Inflation, Unemployment, Interest Rates and GDP Growth Rates So Low? Japanification!

A quick look at The Economist or any authoritative source will reveal a little known reality:

Regardless of policy, politics or ideology, inflation, unemployment and GDP growth rates are historically and universally LOW!

Is this true? And, how can this be? From the most recent economic data section (as of this post) from 2/2/2020's Economist: 

GDP is 2.1% in the US, 0.5% in Germany, and 1.3% in Norway.
Inflation is 2.3% in the US, 1.3% in the Euro area and 1.9% in Peru.
Unemployment is 3.5% in the US, 3.1% in Germany and 3.1.% in Mexico!

Not every number but MOST of these numbers are quite low. The US, Germany, Norway, Peru and Mexico all have quite different politics but not so different results. Unemployment, especially, is low in the developed countries from South Korea to Denmark to the Czech Republic! What in the world is going on?

The answer may be found in Japan! Japan has the one of the lowest economic rates in the world and has had them for nearly two decades. Waves of Japanification-the demographics of aging societies-are sweeping across the developed world. As billions of people retire or retreat from active employment, they are being replaced by fewer and fewer young people-the result from years of low birthrates.

The new economies do not have the population growth, the economic growth or the financial growth of the post-war generations. Even the "robust" innovators, the DISRUPTORS-they only REPLACE existing structures rather than add to the national product. Amazon grows while brick and mortar shrink. Fewer Teslas replace many conventional vehicles. This negative pressure, pushing harder every year, will depress economies until the great generational transition plays out. Its taken a toll on Japan for two generations, since the 1980s, and still isn't done. It may take decades to play out in the West.

So beware those who tout their policies for today's unique low unemployment, low inflation and low interest rates. We may have decades to go before the developed world returns to the glory days of the latter 20th Century!

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Now and Then-the Economy Under Two Presidents

It is wise to be wary of political claims of economic superiority, especially when economic performance is, in fact, the collective performance of ALL Americans, not just one at the top. 

Under Trump, as of the end of his second calendar year in office, 2019:

4Q2019 GDP was just reported up 2.1%.
12/2019 unemployment rate was 3.5%.
The gain in the S&P 500 from inauguration day to 12/31/2019 was 35%.

For the same period under Obama, the end of 2011:
4Q2011 GDP was up 5.4%.
12/2011 unemployment was 5.4%.
The gain in the S&P 500 from inauguration day to 12/31/2011 was 45%.

All Presidents have mixed economic results. No President deserves sole credit for economic results.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.

Year-End 2019 Commodity Market Lab

The Year-End 2019 Commodity Market Lab is posted.

A word on bias

Those who follow my posts see that I am biased toward broad-based stock index funds and against actively managed funds, or buying individual stocks, for that matter. So that begs the questions, exactly which index, which fund and which wrapper (mutual fund or ETF)?

WHY We Buy Stocks

This post attempts to answer WHY we buy the Standard and Poors 500 stock index.
Consider the following Holding Period Returns:

Using monthly closes, starting 12/31/69 or almost 50 years ago to the day, these are the maximum (blue), minimum (red) and average (green) returns for the standard long-term holding periods.  For example there were almost 600 1 year periods since 1970. The largest 1 year decline was near -60%, the highest one year gain was over +40%. That answers how much we can lose in any one year!

Holding Return Table:

Despite the horrendous loss of Feb 2009, note that 75% of ALL 1 year holding periods were GAINS!

The three year periods have a much smaller high to low range. With over 500 3 year periods since the start date, annualized returns ranged from +26% to -19%. Note there were NO LOSING 15 year holding periods!  The expected/average annual return across all periods shown is over 7%.

That's why we buy and hold stocks for the long term.

Another reason we buy S&P 500 funds is that they beat over 70% of actively managed funds nearly every year! For this I send you to SPIVA or S&P Indices Indexology webpage, which does a fantastic job of tracking S&P 500 relative performance.

Final note: Yes, the Nasdaq stock index does consistently beat the S&P500 except when it doesn't. The added gains from holding the NASDAQ do not, IMHO, outweigh the added risk, that is, the larger losses or drawdowns experienced by the NASDAQ. So yes, there are gains to be had but all index gains are at the price of suffering tough drawdowns. S&P 500's Feb 2009's drawdown was hard to live through. It was worse for the Nasdaq.

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.