This month we don’t want to talk about the stock market directly, but indirectly, in a more fundamental way. We want you to step back and view the world with us at a 50,000 foot level. There are three key points for your consideration.
The first is, sooner or later, an investor will have to have someone else buy his or her assets that they are holding. This point is easiest to think of when viewing retirees, who must sell off their assets (stocks, bonds) in order to spend them. You want able buyers or you sell at depressed prices. That’s what happens in free markets. In the United States, we have a very big demographic shift underway with retirees growing at a faster rate than those workers entering the workforce. Notwithstanding the reality that the largest amount of wealth in history will pass by inheritances in the next 30 years, retirees will still be spending and divesting until they leave this earth. Who will buy their assets? The answer, in a not insignificant part, is it will be people in the developing counties who are going to experience what the United States did over the last 100-200 years as they move into the ‘middle class’ (99% of the world currently lives on less than $35,000 per year[i]). They will save, and they thus will buy the assets, as there simply will not be enough American workers to buy them all (Jeremy Siegel soundly makes this observation in a new book I encourage you to read “Stocks for the Long Run” (5th edition)).
Which leads us to the second point. Developing countries must develop, and development means wealth creation. There can be no buying without wealth. History is replete with examples of where you give people freedom, and the proper incentives, and they will naturally ‘develop’. At the beginning of this country, our country’s founders identified the inalienable rights as “life, liberty and pursuit of happiness.” They most certainly did not identify these characteristics because of their powerful economic capacity, but principally because of their desire to be without the bondage of ‘taxation without representation’, to practice religious freedom, to be governed by a rule of law, etc. Alexis de Tocqueville and Adam Smith both lauded the productive impact of these characteristics more than a century after the United States was founded.
Which leads us to the final point. Despotic leaders, corruption, the absence of rule of law, and a judiciary that is NOT independent will lead to economic stagnation at best, and chaos and failure as likely. People will not be free, they will not develop, and they thus cannot create wealth. People around the world are protesting not for equality in income, but for a chance at sufficiency of income. If you don’t have adequate growth, which means good paying jobs, you will have popular unrest. We all observe the ‘Arab Springs’, but we suggest we have that growing unrest in this country as well.
We were going to send this note out a few days ago, but didn’t want it put aside under the public news and unrest of the Ukraine. Yet, if you look at what is happening in that country, we suggest you will aptly note the issues stated above are an underlying cause. Their intended move to the European Union was specifically for development, and it’s denial by corrupt leadership was the match in the tinderbox. In our humble opinion, we will not have peace in this world if people everywhere do not have the opportunity to take care of themselves and their families. Admittedly, we cannot underestimate the power of tanks and aircraft carriers but the uplifting and powerful effects of economic growth are far more freeing and sustaining.
Lest we leave on a dour note, I submit to you the quite objective reasons why we might be living in the best time in history. We just have to work on getting similar benefits of the trail we have blazed to others in the world. It’s in our best interests to do so for a number of reasons, and would be the best humanitarian aid this country could render.
Here’s to peace.
[i] Morgan Housel (“77 Reasons You’re Awful At Managing Money”, Motley Fool, February 10, 2014)
