It’s been a long while since a paper caused as much stir in financial circles as Matthew Klein’s Inequality, Interest Rates, Aging, and the Role of Central Banks. Mr. Klein is a former columnist at The Economist and the Financial Times and is also co-author of the recently published Trade Wars are Class Wars.
Tuesday’s paper spread quickly among macro-focused hedge fund managers, bond traders and economists because of its implications for longer-term interest rates. Mr. Klein argued persuasively that aging population demographics, wealth inequality and low interest rates are all part of the same phenomenon, and no sustainably higher interest rates will occur without massive government policy initiatives to redistribute wealth.
Slowing population growth and a steadily rising average age has been a feature of developed world countries and China since the 1960s. At the current pace, the combined population of high income countries and China is set to decline beginning in the 2030s. “Put another way,” writes Mr. Klein, “the number of children aged 0-14 in these economies fell from a peak of more than 600 million in the mid-1970s to about 465 million now.”
Declining populations imply little need for investment to expand capacity in order to meet the future consumption needs of younger age cohorts. Not only is overall consumption set to fall, but the economic activity that would have been generated by investing in new capacity is also missing. Both of these factors depress growth and interest rates.
Wealth inequality, caused in part by the declining younger populations, is another trend in developed economies. This also results in declining consumption because the uber-wealthy don’t spend a significant proportion of their annual income or capital gains. A technology titan, for instance, might be 100,000 times more wealthy than the average home owner, but they are not about to buy 100,000 homes. The excess wealth, merely saved, does not contribute as significantly to economic growth as if it were spent.
Mr. Klein views the current situation as similar to the early 1930s, another era with extreme wealth inequalities. He writes, “The Great Depression didn’t really end until wartime mobilization caused a surge in incomes and production that wiped out old debts, levelled the wealth distribution, and gave people confidence in the future… Not coincidentally, interest rates marched up for decades until the early 1980s.”
The full nine-page paper is much more in-depth than this summary, of course, and I can’t recommend it more highly. For investors, the implications are that low rates will continue to be a feature of markets, likely including the domestic housing market, until major societal changes take shape.
-- Scott Barlow, Globe and Mail market strategist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Bearish on Canadian real estate or banks? New Horizons ETFs offer leveraged bets on key sectors
Horizons ETFs Management (Canada) Inc. is launching two new sets of exchange-traded funds that will allow investors to bet either for or against two of the country’s biggest sectors: real estate and banking. Brenda Bouw reports.
Three top stock picks from fund manager Irwin Michael
While many portfolio managers are taking a defensive stand amid concerns about slowing global growth, Irwin Michael’s team is positioning its funds for a longer market rally, even if stocks appear richly valued. Mr. Michael is founder and president of Toronto-based I.A. Michael Investment Counsel Ltd., which has about $500-million in assets under management across three funds and three private investment pools. Brenda Bouw tells us about three of his current top stock picks.
BMO hikes targets again on TSX and S&P 500, predicting further big gains ahead
For the second time since last November, BMO’s chief investment strategist Brian Belski has hiked his year-end 2021 price targets for the S&P/TSX Composite Index and S&P 500, citing an unexpectedly robust earnings recovery. Darcy Keith tells us about his new targets, and why BMO sees this bull market not ending anytime soon.
How to satisfy the growing appetite among teens and young adults to learn more about money
Passing over complete control of an investing account to their children might not sit right with many parents. Fortunately, there’s a more palatable option to help those who would prefer to stay in the driver’s seat during their kids’ childhood and teen years: Open an in-trust account, an informal trust used by adults so they can invest funds on behalf of a minor. Kira Vermond tells us more.
Others (for subscribers)
Number Cruncher: 15 TSX stocks with momentum and higher-than-average yields
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.
What’s up in the days ahead
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Globe Investor Staff