I spent several hundred hours earlier this year researching how best to optimize my family’s investments. We are very conservative about how we invest our money. Most of it is in index funds. I think it is a bad idea to have a portfolio that doesn’t have at least a couple high-risk assets, so I embarked on a project to learn more about riskier asset classes and which would fit our lifestyle and long-term goals.
As I did my research into investing opportunities like cryptocurrencies, rental properties, and REITs, I found myself developing beliefs about how the world will look in 10, 20, and 30 years. What follows are not strictly beliefs about economic or monetary trends, but broader thoughts about the world of the future. There’s no way to know for sure whether I’m right about any of this. The best I can do is show my sources and explain my thought process.
I’m sharing this list in case others find it helpful when thinking about how they leverage their own funds to reach their life goals. At the very least, it’ll be fun to look back and realize just how wrong I was!
1 - Demographic trends will lead to slower economic growth, and aging populations
Among the 196 countries listed in the Wikipedia article for population growth with recent data, only 49 (25%) have population growth above the replacement level of 2.1. [source] But those high-growth countries aren’t very populous in absolute terms. More people live in China than in all 49 of those countries combined.
All but the most optimistic UN global population growth models have total world population leveling off by 2100 or even falling. [source] While that might not sound like a big deal in aggregate, it masks some truly momentous trends that will dramatically impact countries that currently uphold the world order.
The aging of a country’s population isn’t cataclysmic on its own. What’s stark about the coming couple of decades is how quickly this is expected to happen in major industrialized nations. The dependency ratio of a country is the measure of old age to working-age people. In China, for instance, that ratio has nearly doubled in the last 20 years, from 11.4 in 2000 to 20.0 in 2020. [source]
One hypothesis floating around economics textbooks and blogs is that much of the gains in so-called per-capita productivity that lifted billions out of poverty and rapidly grew world GDP in the 20th century were in fact just the tailwinds from a rapidly growing world population of young people. That trend is now reversing, and it’s reversing rapidly. [source] [source] [source]
How much an aging population weighs on economic growth in any country will depend on how that country adapts, but it seems reasonable that this trend will accelerate and become more of a topic for discussion in the coming decades.
2 - Inflation will remain above the 2-3% we currently think of as normal
People have been thinking a lot about inflation this year. With consumer inflation hovering in the mid 7% range, the current inflationary environment has been a big shock to younger adults who didn’t live through the stagflation of the late 1970s. Numerous articles like this one from The Economist and this one from the WSJ have dealt with the subject in a sort of transient sense: will inflation go up or down next quarter? Will the Fed continue to raise rates? I don’t have any answers for these immediate questions, but I do think that there are a lot of factors that could cause inflation to remain above 2-3% over the long-term.
First, the labor force participation rate in the US is falling. In 2002, it was 66%, in 2022, it had fallen to 62%. [source] This trend seems poised to continue as the population of Americans over the age of 65 nearly doubles between now and 2060 [source] and fewer people in most demographic categories choose to work. [source] As this trend continues, there will be relatively more people consuming goods and services compared to the people producing them. [source] In an economy increasingly built on just-in-time fulfillment, low inventory, and sprawling supply chains, even small changes in supply and demand can result in large changes to price and availability (just ask anyone who tried to buy a used car in the last year or two). This could create an environment in which demand from more buyers creates insurmountable upward pressure on goods and services that are difficult to rapidly create more of. Many goods from natural gas to semiconductors require lead times measured in 5 or 10 year increments to dramatically expand supply.
Second, inflationary cycles persist when workers negotiate aggressively for higher wages and that is already being seen in G10 country’s year on year percent wage increases. [source] If this persists, it may be difficult or impossible for the Fed to permanently bring inflation down. This is more of a social/cultural effect, but it doesn’t take long to start the chain reaction: people’s purchasing power is being rapidly eroded and wages aren’t keeping up.
Third, government debt worldwide has tripled in the last 15 years, from approximately $20 trillion to $61 trillion. [source] This quick growth in debt could incentivize central banks to “inflate away” the real purchasing power of their debts by allowing interest rates to remain at historically high levels. This will be especially tempting in the US, which has perverse incentives that other countries don’t face by virtue of being the global reserve currency. Yes, the Fed is an independent, supposedly non-political actor, but this has happened before. Inflation was instrumental in wiping out the massive US government debt from WW2 and the economy experienced >5% yearly inflation for 8 years between 1974 and 1982. Today’s Fed policies are a product of that stagflationary period and Jerome Powell and his predecessors have been more aggressive about maintaining low nominal interest rates than in earlier US history, but there is historical precedent for something like this to occur. [source]
Finally, an aging population implies more people withdrawing from, rather than contributing to, their savings and investments. It also means that existing savings will get shifted from instruments like pension funds and stocks to bonds and cash. As the baby boomers get older and draw down and give away their $71 trillion dollars of wealth [source], the availability of capital to key job producers could shrink. This would cause those corporations to bid up the cost of borrowing, which would put additional upward pressure on inflation. [source]
To be clear on this point, I don’t think inflation in the US will remain extremely high (at the time of writing this paragraph, CPI inflation was ~7%). I think that price inflation will come down, just not all the way to the levels seen before the covid pandemic (2-3%). If I had to hazard a scientific wild-ass guess (SWAG), I’d say that 4-6% seems like it could become the new normal.
3 - Climate change will be very impactful, but not apocalyptic
I think it’s very strange that asset prices haven’t adjusted more to the growing certainty about climate change impacts. I think we now know enough to predict some very specific mega-trends:
Certain vulnerable coastal cities will see increasing damage from tidal flooding, hurricanes and seawater inundation. [source]
Fresh water crises and rationing will become more commonplace in western cities as the Colorado river and other major western reservoirs dry up. [source] [source]
Increasingly destructive wildfires will threaten properties and lives in western cities on a more regular basis. [source]
Fewer and more intense rainstorms will alternately cause drought and flooding in the northern midwest. [source]
Average temperatures across the entire US will rise. [source]
So many books and articles have been written about these trends that I don’t think it’s especially useful to do that here. Suffice to say, we know an awful lot about what is likely to happen to our way of life in the not-so-distant future.
How, exactly, these pressures are incorporated into the fabric of human society remains to be seen. I’ve been actively trying to find books written about these predicted second and third order climate change effects (if you know of any, please send them to me!), but haven’t found any good ones yet. Yet homes continue to be insured on the Miami coastline despite rising rates [source], arid western cities like Phoenix continue to grow [source], and flood control infrastructure on the Mississippi river is reaching its limit with no plans for expansion or overhaul [source].
To counterbalance some of this doom and gloom about climate change, I don’t think the world is going to end in brimstone and fire either - at least not in the next 30 years. Barring some very well-researched arguments about second and third order effects (seriously, send me your book recommendations!) Climate Change is going to unfold slowly. It’ll happen in a geologic micro-second, but our lives fit into geologic nanoseconds, so that’s less horrifying than it sounds.
4 - Unlike other major economic powers, the US alone stands to gain from immigration population growth
The US, Japan, China, and Germany together represent just over half of world GDP in 2022. [source] Among those countries, every country but the US is expected to experience population declines. [source] According to the US census bureau, “net international migration to the United States will become the primary driver of the nation’s population growth between 2027 and 2038.” [source]
Even with the Covid 19 pandemic, this is already starting to be seen in US population data from 2022. [source] As the 21st century continues, immigration will be the critical determinant of whether industrialized countries experience population growth, and thus stave off aging workforces and flat or negative growth.
The US has remained the main destination for international migrants since 1970 [source] and seems poised to experience increased population growth driven by international immigration in the coming 10 to 20 years. A few years back, I wasn’t so bullish on the immigration future of the US. Rising nationalism and stringent immigration barriers remain obstacles to remaining the number one destination for immigrants, but as the recent zero Covid policies in China make clear, living in the US is still a very appealing proposition for the most wealthy and productive humans on the planet. Things would have to get much, much worse in both absolute and relative terms for that to change.
5 - Real rates of return for stocks and other mainstream assets will revert to ~4-5%
This one is a bit of a hot take, but bear with me.
Due to an aging population [see point 1] and higher inflation [see point 2], real global economic growth will slow down through mid-century. The inflation-adjusted rate of return for the S&P has been 7% [source], but over much longer historical time periods, the rate of return has been closer to 4-5%. [source]
This point in particular is always a point of contention in the FIRE communities I frequent. The doomers think that the only safe withdrawal rate is much lower than 4% and secular financial advisors will tell you it’s much higher. I’ve arrived at the approximate 4-5% range primarily by reading a lot about the history of economics and money.
Not every culture and civilization that has relied on fiat currency has settled on the 4-5% number. There’s nothing magical or immutable about it. But for the last 500ish hundred years, Western European societies have experienced growth that fell in that range in real terms and I think there are at least some reasons to believe – barring some massive unpredictable event like WW3, nuclear armageddon, or an AI takeover – that the economic future of America looks a lot more like the 18th and 19th centuries than the 20th. Chief among these are the demographic trends noted above, economic headwinds from climate change, and increasingly wealth inequality.
6 - Remote knowledge work will be remain substantially more common than pre-pandemic
The recession that’s kicking off has caused tech companies to lay off workers and shift the balance of negotiating power back towards management. And managers like working in offices. [source] A retrenchment towards the historical norm of working together was inevitable. The pandemic forced an enormous number of knowledge workers into their bathrobes and living rooms. Far more people worked remotely than would have otherwise done so if given the choice. And that makes sense: even if you like working in an office, the prospect of dying or being hospitalized is enough for most people to forego that preference.
But here we are: those of us that opted to get vaxxed are, those that don’t believe in vaccines didn’t, and we’re all just getting back to normal. It is both healthy and expected that the remote working trend will reverse to some extent.
However, I think the pandemic opened Pandora’s box on this one. Managers who would have absolutely refused to let their teams work remotely, citing certain ruin and company insolvency, were forced to do it anyways for 2 years. And it mostly, sorta worked.
In 2022, 45% of FTEs were working fully or partly remote, with 9/10 remote workers seeking to maintain their remote work to some degree. [source] Although many employers are ramping up their return to work campaigns and the number of remote workers is expected to fall, estimates of the long-term remote workforce range from 16-22% as soon as 2025. [source] [source] That’s a big shift from the pre-covid days when fully remote workers were much more of an oddity in corporate America.
7 - New technologies will continue to lower the costs of living outside dense US urban hubs
For the last several hundred years, humans have been urbanizing at a rapid pace: even in the 1860s, less than 20% of Americans lived in cities. Today, that number is over 80%. [source] The reasons humanity urbanized are many, but some of the biggest were access to economic activity, more leisure time, and access to different social opportunities.
Today, those trends are reversing, but in counter-intuitive ways. I don’t believe the future of America is rural, but I do think the hegemony of the biggest cities and their high-density living patterns will wane as secondary and tertiary markets become more appealing. This will be driven by three factors
Better connectivity. Connectivity outside of America’s largest urban areas is increasing rapidly. Even just in the last couple of years, Americans without access to broadband dropped by 20%. [source] The per megabit cost of internet bandwidth fell 98% between 2000 and 2020 [source] and while the US still has connectivity challenges, 5G [source], Starlink [source], and increasing fiber penetration [source] promise better connectivity than ever before.
An increased cultural acceptance of remote work. See my point above for the full argument, but a whole generation of people have just learned first-hand that remote work is a lot more feasible than it seemed in 2019.
New long-shot technologies reaching commercial maturity. Despite self-driving passenger cars perpetually being “10 years away” [source], Cruise has already logged 600k driverless miles in San Francisco. [source] But even if fully self-driving cars do turn out to be a pipe dream, even just automating highway driving would make living further from a city easier. And self-driving on the highway is a much more realistic goal to achieve in the next couple of years. Tesla’s existing autopilot feature may already be safer than human drivers on highways, although it is hard to fully verify the claim. [source] In other realms, physical goods will become increasingly available at a moment’s notice with decentralized drone shipping. Amazon started an experimental drone delivery service in California last summer. [source] Technologies like air taxis promise to cut commute times into city centers and tie together disparate suburbs into a more consolidated metro area. [source]
Not all of these trends need to be fully realized for my prediction about de-urbanization to come true. In 2022, for instance, most of the fastest-growing places in America were smaller or mid-sized cities rather than already-dominant cities like LA and New York. [source] Within each metropolitan area, I predict an increasing shift to lower-density living in suburbs and exurbs.
As an example, the city of San Francisco lost 6.3% of its residents between 2020 and 2021. [source] Over the same period of time, Manhattan lost 6.6%. [source] Strikingly, neither the Bay Area metropolitan area nor the NYC metro area has seen measurable population declines over the same period of time. [source] [source] People are moving from high density areas to lower density areas in the same metros.
The Covid pandemic kicked it off, but I suspect the trend of moving out of dense city centers and into the adjacent suburbs and exurbs will continue for quite a while. What this means is that places like the New York Metro Area will continue to bloom, attract talent, and be great places to live, but formerly prosperous areas at the very heart of those metros may wither and become less attractive and convenient.
Conclusion
Who knows whether any of these predictions will come true. As I said at the beginning, if there’s one thing that people are really bad at doing, it’s trying to predict the future. But when you are making long-term plans, the only way to do so consistently is to form hypotheses and run with them. These are my hypotheses and I’m looking forward to learning if they were right or wrong.
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