Will Stock Markets survive in 200 years PowerPoint Presentation

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Will Stock Markets survive in 200 years? Several of them may not make it till 2050 Gaetan Lion, January 13, 2022

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Introduction 2 Within a related study “The next 200 years and beyond” (see URLs at bottom of the slide), we disclosed that population and economic growth can’t possibly continue beyond just a few centuries. Just considering what seems like a benign scenario: … Zero population growth with a 1% real GDP per capita growth … … would result in the World economy becoming 8 times greater within 288 years and 16 times greater within 360 years. Thus, the mentioned scenario, as projected over the long term, is not feasible. This study contemplates how will stock markets survive in the absence of any demographic and economic growth. The whole body of finance supporting stock markets (CAPM, Dividend Growth model, Internal Rate of Return, Net Present Value) evaporates in the absence of a growth input (market rate of return, dividend growth, etc.). We uncovered that several stock markets are already butting against those prospective growth constraints. https://www.slideshare.net/gaetanlion/the-next-200-years-and-beyond https://www.slidesfinder.com/gaetan/the-next-200-years-and-beyond-economic-powerpoint-presentation/4462.aspx

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The Stock Markets already running into prospective growth constraints 3 Source: FRED/World Bank, Trading Economics We found 11 international stock markets who have lost much of their value after adjusting their market level for inflation. On an inflation adjusted basis, these respective stock market levels are often way below where they were up to 22 years ago. Over a similar period, we show how the S&P 500 kept on growing just fine, even when adjusted for inflation (see yellow highlight). So, for these stock markets failing at creating wealth over the long-term is not several centuries out. It is right now!

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The Stock Market Engine 4 It is very simple. It is driven by just two causal forces: Demographic growth; Labor productivity growth (captured as Real GDP per capita growth). To create wealth or capital over the long term, the stock market pretty much needs to be running on both cylinders. We will review trends of both mentioned causal forces for the 11 countries with already impaired stock market performance and outlook.

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Overall Demographic Trends 5

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6 All 6 countries that are part of Europe and the Soviet Block are experiencing fairly rapid decline in population growth over the past half century. Russia, Ukraine, Greece have already experienced negative population growth. Source: FRED, World Bank * We include Ukraine as part of a Soviet Block. Given contemporary events, this is not a stretch even though one may advance it is not technically accurate. The objective was to create a large European group with countries that do have similar demographic trends, and ethnicity.

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7 This graph is more as the negative population growth trend for Greece, Ukraine, and Russia are readily identifiable. Source: FRED, World Bank

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8 The 5 other countries are also experiencing a decline in population growth. And, Japan is already experiencing negative population growth. Source: FRED, World Bank

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9 All 5 “other” countries are experiencing a decline in population growth rate. And, Japan’s population is already contracting (negative population growth, not just declining population growth rate). Source: FRED, World Bank

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10 The Old-age dependency ratio has risen rapidly for the Europe & Soviet Block… and extremely rapidly for Japan. This is a very strong headwind for all those respective international stock markets. The rise in this ratio is associated with underlying decline in both demographic growth and economic growth ( Real GDP p.c.).

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Demographic Trends: France Europe & Soviet Block 11

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12 This group represents the pensioners. They disinvest from the stock market by liquidating their 401ks, IRAs, etc. They are a huge fiscal cost. They have a negative impact on demographic & economic growth and the stock market. This group represents the labor force. They are both the producers and consumers of goods and services. They boost economic & demographic growth. These three groups represent the future, as they will sequentially age into the labor force of the future. This group is a negative for the stock market. They are old “disinvestors.” This group is a positive for the stock market. They are investors. These young groups represent the future and future prospect of the stock market.

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13 What rapid aging population looks like when looking at age group mix The old disinvestors grow rapidly from 11% in 1950 to 20.7% in 2020 and to 31% of the population by 2100 The labor force age group shrink quite rapidly from 51% down to 44% of the population by 2100 The young groups shrink very rapidly from 38% down to 25% of the population by 2100 For the record this country’s stock market lost -24.6% of its real value since August 2000. This rapid aging of the population entails a very poor prospect for demographic & economic growth and for the stock market. Notice that this rapid aging is not just a forecast. It is already very pronounced over the historical period from 1950 to 2017.

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Demographic Trends: Greece Europe & Soviet Block 14

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15 The rapid aging is already pronounced by 2017 (end of historical period). And, projections out to 2100 suggests this aging trend is going to accelerate to such a point that the overall population will decrease by – 35%. These trends are devastating to a stock market. We do not foresee any way how the Greek stock market could possibly create capital going forward. For the record, this country’s stock market lost - 89.8% of its real value since November 1999.

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16 The old disinvestors have grown from 6.7% of the population in 1950 to 21.1% in 2020. And, are expected to reach 35.5% by mid century and remain there until 2100. We don’t foresee how such a market could possibly create capital going forward. And, these trends explain how it has destroyed much capital over the past couple of decades. 6.7% in 1950; 21.1% in 2020; 35.5% by 2050

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Demographic Trends: Italy Europe & Soviet Block 17

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18 Exact same situation as Greece. The related stock market has lost – 62.8% of its real value since February 2000. And, the future looks worse.

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19 Exact same situation as Greece. Demographic trends explain why the Italian stock market has not created capital over the past couple of decades. And, has no way of creating capital going forward with old disinvestors expected to represent 34.5% of the population by 2050. 8.2% in 1950; 24.0% in 2020; 34.5% by 2050

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Demographic Trends: Spain Europe & Soviet Block 20

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21 Exact same situation as Greece. This country’s stock market has lost – 58.6% of its real value since February 2000. And, the future looks worse.

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22 Exact same situation as Greece. Demographic trends explain why the Spanish stock market has not created capital over the past couple of decades. And, has no way of creating capital going forward with old disinvestors expected to represent 36.3% of the population by 2050. 7.2% in 1950; 20.8% in 2020; 36.3% by 2050

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Demographic Trends: Russia Europe & Soviet Block 23

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24 Similar trends to Greece. The Russian stock market has lost – 18.1% of its real value since May 2008. But, based on current demographic trends, the future performance of this stock market could be worse.

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25 Similar trends to Greece but not quite as pronounced probably due to shorter life span. 4.8% in 1950; 15.5% in 2020; 24.2% in 2100

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Demographic Trends: Ukraine Europe & Soviet Block 26

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27 Similar trends to Greece. But, the overall decline in population is even more pronounced. Ukraine’s population was 51.5 million in 1991. It decreased to 43.4 million in 2020. And, is anticipated to decline to 28.2 million by 2100. We can see how this market has wiped out a huge amount of capital (lost – 92.7% of its real value since October 2007), and will continue to do so.

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28 7.6% in 1950; 17.3% in 2020; 27.3% in 2100 Same comment as on previous slide.

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Conclusion regarding demographic trends for Europe & Soviet Block 29 Out of this region 6 reviewed countries only one (France) is not forecasted to experience a rapid decline in overall population over the remainder of this century. Besides this one single diverging trend, all 6 countries, in terms of demographic profile, look very similar. Within their demographic mix, they all experience a very rapid growth in the old disinvestor population (both historically since 1950 and prospectively out to 2100). This rapid aging of the population combined with rapid overall rapid population contraction (except for France) represent serious road blocks to stock markets remaining viable in terms of raising equity capital for companies and increasing wealth for investors. All these countries stock markets have performed poorly over the past decade or two. And, going forward based on the reviewed demographic trends, they can be expected to perform far worse. Their respective viability is highly questionable.

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Demographic Trends: Brazil 30

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31 Brazil’s population is still relatively young now. But, going forward it will age very rapidly.

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32 3.0% in 1950; 9.6% in 2020; 32.0% by 2080 Much before the end of the century, Brazil’s demographic profile will be similar to European countries. Such an old population profile will make it very difficult for the Brazilian stock market to raise equity capital and boost investors’ wealth. The Brazilian market has lost – 35.3% of its real value since May 2008. And, the future performance is likely to be far worse.

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Demographic Trends: Mexico 33

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34 Exact same situation as Brazil.

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35 3.4% in 1950; 7.5% in 2020; 33.5% by 2100 Exact same situation as Brazil. The Mexican stock market has lost – 11.8% of its real value since May 2008. But, its future performance is likely to be worse based on the mentioned demographic trends.

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Demographic Trends: Japan 36

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37 Japan is the iconic country for aging population. It is very similar to a European country. Actually, it has lead the European countries on this population aging curve.

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38 5.1% in 1950; 28.2% in 2020; 36.4% by 2050 The Japanese stock market has lost – 35.3% of its real value since December 1989. And, based on the mentioned demographic trend, this market future performance may be worse.

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Demographic Trends: Saudi Arabia 39

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40 This is a country with a very young population so far. But, the population will age very rapidly during the remainder of this century. Despite its young population, this country’s stock market has already lost – 67.4% of its real value since February 2006. Based on the prospective rapid population aging, the performance of this stock market may be worse going forward.

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41 3.3% in 1950; 3.8% in 2020; 28.7% by 2100 Another country with a young population that will age quite rapidly during the remainder of this century. This prospective trend will have adverse consequence for this respective stock market ability to raise equity capital and increase investors’ wealth for the remainder of this century.

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Demographic Trends: United Arab Emirates (UAE) 42

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43 Another country with a very young population that is expected to age very rapidly during the remainder of this century.

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44 3.4% in 1950; 1.4% in 2020; 26.4% by 2100 This country’s stock market has performed very badly (- 73.8% in real terms since October 2005). And, it may very well perform even worse going forward based on the bearish demographic outlook.

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Conclusion regarding demographic trends for the “Other” countries 45 Many of these countries have currently a population that is a lot younger than the European countries. However, going forward all these countries respective populations will age very rapidly and will end up looking very similar to the European countries and Japan. All these countries respective stock markets have performed poorly over the past decade or two. Based on the mentioned demographic trends, we can expect them to perform even worse going forward.

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Real GDP per capita growth 46

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47 Source: FRED, World Bank * Ukraine and Russia is missing data prior to 1998. This is in part due to the recent dissolution of the USSR.

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48 Source: FRED, World Bank Constant GDP p.c. has already gone negative in Greece, Italy, Spain. It is currently very close to 0.0% in France. And, while still positive in Ukraine and Russia, it has decreased rapidly since 2005.

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49 Source: FRED, World Bank

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50 Source: FRED, World Bank Constant GDP p.c. has gone negative for Brazil. It is close to 0.0% in Mexico. It has been rapidly declining in Japan since 1970. And, it has been most often in negative territory for Saudi Arabia and the UAE.

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Conclusion for this real GDP growth p.c. section 51 There is an overall downtrend in real GDP growth p.c. for the 11 countries reviewed. As mentioned, each of these countries are associated with a current and prospective rapid population aging and a poor performance in their respective stock markets over the past decade or two. Thus, these countries stock markets may run into unsurmountable challenges in raising equity capital and increasing investors’ wealth going forward.

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Stock Market Evaluation 52

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Stock Market evaluation Europe & Soviet Block 53

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Stock Market Cap to GDP 54 The Stock Market Cap/GDP ratio data comes from FRED & World Bank. And, the time series ends at the beginning of 2017 (at times beginning of 2014). We made a best effort to update this ratio using the change in market level and nominal GDP since the beginning of 2017 or 2014. However, the underlying data has many discrepancies. Several countries’ GDP data is updated only annually and with long lags (most current nominal GDP level is 2020 in such cases). Additionally, the data are very volatile affected by the COVID period. Thus, the “Current” Stock Market Cap/GDP figures are not deemed to be precise. But, they are directionally informative.

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55 France Source: FRED, World Bank, Trading Economics, G. Lion estimates (CPI November 21). This table is the only data that gives you accurate information regarding how a market has maintained its real level after adjusting for inflation. On such a basis, this market has lost – 24.6% of its real level between August 2000 and November 2021. This stock index chart just shows the level of such a stock market, but with no inflation adjustment. On this basis, its depicted increase is a visual illusion.

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France CAC 40 vs. S&P 500 56 Source: Yahoo Finance S&P 500 There is a lot of apples-and-oranges within this Yahoo Finance graph comparing the performance between the French CAC 40 index and the S&P 500. These divergences may include: The two different indices are probably reported in their respective currencies (Euro and $USD, respectively); They are not adjusted for inflation (with different inflation for the two countries); The return as depicted may not be entirely accurate. Despite all the above caveats, the visual data gives you little doubt that the French CAC 40’s performance has been far weaker than the S&P 500 that we use as a control.

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57 Stock Market Cap to GDP data is limited as provided by FRED/World Bank. At times, this metric can give us an assessment of how much life left a market has by looking at this scaled comparison to the size of an economy. On this count, the French stock market looks ok. Between 2000 and 2017, it has maintained an adequate scale relative to GDP. And, current estimate is at 124 percent probably reflecting the impact of the European current expansive monetary and fiscal policies. Current estimate: 124 percent

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58 Source: FRED, World Bank, Trading Economics, G. Lion estimates (CPI November 21). Greece No matter how you look at it, the Greek stock market has performed spectacularly badly. It’s level is around – 90% lower in real term compared to what it was either going back to July 1990, November 1999, or October 2007. It is unclear how this stock market has remained open. From a performance standpoint, it has the profile of a market who should have been shut down a long time ago. Given the dire demographic and economic growth prospect of the country, it is unclear how long this market can keep on trading.

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Greek stock market vs. S&P 500 59 Source: Yahoo Finance S&P 500 A market that has chronically collapsed will obviously look pretty bad when compared to the S&P 500. Remember that the Yahoo Finance returns are not adjusted for inflation. So, whatever total return is disclosed, the real return is far lower.

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60 This is a classic curve of a stock market that is becoming immaterial as its market cap has decreased from 75% of GDP in 2007 down to under 30% ever since 2010. That’s probably how stock markets die as this ratio could finally drop to 0%. A stock market cap to GDP ratio can drop for several reasons: Stock valuations decline; Publicly held companies (stock issuers) fail, go bankrupt, are self-liquidated. Both forces can lead to the same place… a stock market eventually disappearing. And, this manifests itself with a shrinking Stock market cap/GDP ratio. Current estimate: 29 percent

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61 Source: FRED, World Bank, Trading Economics, G. Lion estimates (CPI November 21). Italy Very similar story than for Greece. You can see how this stock market had past peaks in February of 2000 and April of 2007. And, it never recovered. Adjusted for inflation, this market may never recover and reach back to these former peaks. As reviewed earlier, the demographic and economic growth trends are very discouraging. And, they suggest that the worse is yet to come… if it is possible.

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62 Italian stock market vs. S&P 500 Source: Yahoo Finance S&P 500 Same comments as for Greece.

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63 Similar comments as for Greece. This stock market looks like it is experiencing a slow death. Its stock market cap to GDP ratio has remained much below 40% since 2008. Current estimate: 34 percent

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64 Spain Source: FRED, World Bank, Trading Economics, G. Lion estimates (CPI November 21). Very similar situation as for Greece and Italy.

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65 Spain stock market vs. S&P 500 Source: Yahoo Finance S&P 500 Very similar situation as for Greece and Italy.

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66 Similar comments as for Greece and Italy. This is another stock market that looks like it is slowly dying over time. Its market cap to GDP has pretty much steadily declined since 2007. Current estimate: 56 percent

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67 Ukraine Source: FRED, World Bank, Trading Economics, G. Lion estimates (CPI October and November 2021) Ukraine situation is so similar to Greece that we copied the profile of the Greek stock market index below. We can see similar peaks at slightly different times. While current levels are no where near the levels from the former peaks distant in time. It is really unclear how both markets have been able to raise any equity capital for companies.

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68 Source: Trading Economics Ukraine Stock Market vs. S&P 500 S&P 500 Yahoo Finance did not have data for this Ukraine stock index. So, we used Trading Economics. There may be even more apples-and-oranges here. Using this website, we also had little control on the time range X-axis. Notice also the double Y-axis, with the S&P 500 level on the left and the Ukraine stock index level on the right. The main point of this visual data is that you can readily see that the Ukraine stock index has never recovered from its earlier peaks. Meanwhile, the S&P 500 clearly has.

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69 Ok, this market is literally on its last breath as its Market Cap/GDP is approaching 0%. Current estimate: 6 percent

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70 Russia Source: FRED, World Bank, Trading Economics, G. Lion estimates (CPI November 21). Relative to the other reviewed European markets, the Russian one has performed relatively well. That’s even though after adjusting for inflation, its real level is still – 18.1% lower than it was back in May 2008.

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71 Russian Stock Market vs. S&P 500 Source: Yahoo Finance S&P 500 As shown, the Russian stock market index has performed just about as well as the S&P 500. However, there are numerous caveats to this comparison. If adjusted for inflation, the Russian stock market index relative performance would weaken considerably. Also, notice that the available data goes only back to 2013. If we could go further back, the differentiation between the two markets could be greater.

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72 Based on updated estimate, this market cap to GDP ratio has had quite an upward bounce. On a stand alone basis, this would suggests a market momentum revival. However, when reviewing demographic trends the long term outlook is not encouraging. Current estimate: 59 percent

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Stock Market evaluation Other Countries 73

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74 Brazil Source: FRED, World Bank, Trading Economics, G. Lion estimates (CPI November 21). Fairly similar situation as Russia. On a relative basis, this stock market past performance has not been as devastatingly bad as some of the European ones. Still when adjusted for inflation, this stock market level is – 35.3% lower vs. its level back in May of 2008.

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Brazilian stock market vs. S&P 500 75 Source: Yahoo Finance S&P 500 The Yahoo Finance chart suggests that the Brazilian stock market has performed far better than the S&P 500 using a long time series going back to 1997. However, this is a visual illusion that needs to be corrected for inflation. Below, we replicate the tables of those respective stock market levels with inflation adjustments. On this basis, the Russian stock market does not look so good.

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76 Current estimate of the stock market cap to GDP ratio suggests it is at a peak level over 100% since 1996. We have much reservation whether this high estimate has much relevance regarding the long term outlook for this country due to the reviewed demographic trends and the decarbonization of the World economy. Current estimate: 103 percent

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77 Mexico Source: FRED, World Bank, Trading Economics, G. Lion estimates (CPI November 21). This is another stock market that performed much better than the European ones. That’s even though when adjusted for inflation, its current level is – 11.8% lower than it was back in May of 2008.

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78 Mexico stock market vs. S&P 500 Source: Yahoo Finance S&P 500 Going back to 2008, the Mexican stock market has performed much worse than the S&P 500. And, if we adjusted with the respective countries’ inflation rate, the divergence between the two markets would be far greater.

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79 Over the entire covered period up to current estimate, the market cap to GDP ratio has remained the majority of the time below 40%. Based on reviewed demographic trends, and questionable economic governance, we can expect this ratio to decline over time. Current estimate: 31 percent

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80 Japan Source: FRED, World Bank, Trading Economics, G. Lion estimates (CPI November 21). The Japan stock market (Nikkei 225) is still -35.3% below its peak over 30 years ago back in December 1989.

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81 Japanese stock market vs. S&P 500 Source: Yahoo Finance S&P 500 No surprise here. The S&P 500 over the long term (and shorter terms too) has performed far better than the Japanese Nikkei 225.

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82 On this one count, the Japanese market looks sound. Its Market Cap/GDP ratio appears to have bounced upward in current times. Although, Japan is the iconic slow growing country, its stock market looks like it has much life left. Whether this will be the case beyond mid-century is a tough issue that faces all 11 countries covered in this study. Current estimate: 172 percent

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83 Saudi Arabia Source: FRED, World Bank, Trading Economics, G. Lion estimates (CPI November 21). Another stock market that is still way below its previous peaks in February 2006, during the worldwide Great Recession (December 2007), and later in August 2014. Given current demographic and economic trends, and decarbonization of the World economy, this market is likely to never recover.

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84 Saudi Arabia stock market vs. S&P 500 Source: Yahoo Finance S&P 500 As a proxy for the Saudi Arabian market, we could only find a related ETF fund with data going back only to 2017. That’s not much data. But, we can see that the S&P 500, even over this short period, did quite a bit better than the Saudi Arabian ETF proxy for its market.

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85 This market has experienced a bit of a cat bounce. Long term outlook, based on demographic trends and decarbonization of the World economy, is not encouraging. Current estimate: 80 percent

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86 United Arab Emirates (UAE) That’s another market that performed really poorly and never came close to reaching back to its former peak levels. As shown, in November 2021, after inflation adjustment, its level was – 73.8% lower than its former peak in October of 2005.

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87 UAE stock market vs. S&P 500 Source: Yahoo Finance S&P 500 At Yahoo Finance, we could only go back to 2010. But, we can see that over this period, this market performed far worse than the S&P 500.

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88 As estimated, this market is currently experiencing a decline in its market cap to GDP ratio from 60% in 2017 to closer to 50% in recent times. Over the long term, we can expect this ratio to continue declining based on reviewed demographic trends. Current estimate: 50 percent

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89 Closing Considerations

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Summary Outlook 90 We expanded a table summarizing stock market index change adjusted for inflation by adding the % of “disinvestors” or the population that is in retirement and selling stocks. We looked at three dates: 2020, 2050, 2100 using the data from the UN World Population Prospects. You can see how in 2020, Japan has by far the highest % of Disinvestors. But, by the end of the century the other countries have pretty much converged towards Japan level.

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Can the markets of Greece, Italy, and Ukraine survive for long given the rapid rise in Disinvestors (age 65 +)? 91 Current estimate: 29 percent Current estimate: 6 percent Current estimate: 34 percent

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What happens when a company can’t grow? 92 Wells Fargo Bank of America Wells Fargo is mandated by the OCC to not grow its balance sheet beyond its level as of 12/31/2017. Ever since its stock has gone nowhere. Meanwhile, its closest competitor, Bank of America, has experienced a rapid rise in stock value & return. If the OCC keeps its no-growth mandate in place, Wells Fargo will eventually be merged, resolved, liquidated, or taken over by the Government.

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Considerations 93 In our earlier study “The next 200 years and beyond”, we outlined how the World is headed towards a no-growth situation in both demographic and economic growth. And, current trends over the past few decades confirm the World is already heading in that direction. In our minds, this raised existential considerations for stock markets. This study uncovered several stock markets that already experience current and prospective growth constraints. And, the survival of several of those markets till 2050 appear questionable. Place yourself in the shoes of college graduates entering the labor force and investing in their 401K for retirement. The common wisdom is to invest the majority of such funds in the stock market to reap maximum growth over the long term. Such a well established strategy, would most probably not work out for the majority of the 11 markets reviewed. And, it could be devastating if the college grad lives in Greece, Italy, or Ukraine. Similar considerations, within the same mentioned countries, would affect any institutional investors focused on the long term such as pension funds, endowment funds, insurers, retail index fund investors, etc. In the US, we may be spared these bearish considerations, but for how long? A century or two from now, we in the US may be affected by the same considerations.