Tailwinds That Shaped the Century: What They Are and Why They're Slowing

For quite some time I've been thinking about my grandfather and his incredible life story, and the life stories of some of my friends' and relatives' ancestors.

One theme that has been common across all the stories is the dramatic differences in environments that their generation experienced in their youth versus their old age. The last century, and specifically the post-war era, has been a unique and prosperous phase of history; it was a time in which incredible advancements in human civilization occurred, and saw some of the greatest wealth generation humanity has ever seen.

There was a confluence of factors that lead to these great outcomes - some of which are slowing down, and some of which are reversing. In this post, I'd like to touch upon some factors that resulted in our grandfathers' generation to witness unprecedented economic prosperity and large improvements in social mobility.

I am not saying our grandfathers' generation had it easy: on the contrary their life's stories are great because of all the triumphs and tribulations that they encountered. They likely had tougher and less comfortable childhood and experienced very difficult situations throughout their lives.

But I would argue that the opportunities for climbing up the socio-economic ladder is now tougher and will remain so for quite some time. Social mobility during the last 50-75 years were unprecedented, and some global trends will make it harder for our youth to experience the same level of upward social mobility.

It is for that exact reason I think it is critical for young people to learn the basic tenants of wealth generation as early as possible.

No one should wish for an easier life. You should wish (and work) to build the character traits needed to navigate a hard life.

Life is meant to be tough, and we live unbelievably comfortably relative our ancestors.

This blog will discuss the trends that made the last 75 years great for upward social mobility, and why those trends are now at risk of being reversed. My next blog post will discuss the basic tenants of wealth accumulation.

Trends That Shaped the Post-War Era:

A cocktail of 4 favorable trends took place over the last 75 years or so that generated some of the largest increases in wealth humanity has ever seen. The four trends are globalization, industrialization, demographic growth, and urbanization. During the post-war era, countries around the world were able to industrialize as the trend of globalization spread. Populations grew, output grew, more people moved from rural to urban areas to get higher paying jobs within cities. Some of these trends have already begun to stall and even reverse.

1) Globalization:Post-WWII, the U.S.A, using their large and unrivaled navy, went on to patrol the global seas in order to encourage international trade in an effort to combat the spread of communism.

This was a fundamental pillar for globalization: for most of history, trade through international waters had its risk. The U.S essentially eliminated that risk, free of charge, so that economies could trade.

Most goods (close to 90% currently) has been transported via sea since the advent of deep-sea shipping as it is the most fuel-efficient mode of cargo transport. (It is currently 12-16 times cheaper to transport goods via sea than air).

Conclusion: The U.S patrols and facilitates international trade.

2) Industrialization:Various countries industrialized at different times, which affected those countries economic and social profiles. Most countries that we consider developed (Britain, Western Europe, the U.S and Canada) began industrializing between the late 1700's and late 1800's. Most developing countries, the ones that we call 'emerging', only started industrializing in the mid to late 1900's. China emerged as an industrial player and used its large and low-cost work force to help flood global markets with increasingly cheaper goods, resulting in low or negative levels of inflation.

China quickly found built itself into becoming the assembly line of the world, and its growth also helped bolster the economies of other APAC and East Asian countries who benefited from trade with China.

Most countries that relied on primary sector activities like fishing in the 1960's, such as South Korea and Indonesia, are now major economies that have complex economic systems with at least some level of industrial activities.

3) Demographic Growth:As countries industrialized, rapid population growth was inevitable. Agricultural output boomed when industrial machinery and modern methods (as well as the production of industrial-scale fertilizers) were introduced to farming.

Modern advancements in healthcare has helped populations grow through lower mortality rates. This was done through various means, most of which arose because of industrial-scale production:- better science-based best practices within healthcare- coupled with better and cheaper medical devices, and- superior drug development- coupled with industrial-scale pharmaceutical production

This era saw the eradication of several diseases such as Polio and Smallpox, as well as medications for diseases that used to be fatal such as diarrhea and malaria.

4) Urbanization

Today, 60% of the world's population lives within cities. The change in urban populations have been drastic.

The earlier generations who were around when this trend started were able to secure a property more easily, as they were cheaper relative to incomes. They also saw the value of real estate climb overtime, as more urbanization (coupled with a rapidly growing population in an increasingly globalized world) took place.

A person's home is the largest (and often the sole) asset they own. Purchasing a home was easier and could be done earlier in life during the past century.

Urbanization allowed homeowners to benefit from a strong residential real estate market that grew throughout the duration of their lives at an unprecedented pace, building an unprecedented amount of equity for its owners.

Changing Tides: Tailwinds Begin to Stagnate and Reverse

The U.S is now starting to de-emphasize that role as it assumes a more isolationist foreign policy. The U.S sees itself as not needing to be an active 'altruist' within the international arena because of several economic and geopolitical factors that is making the North American continent more self-sufficient.

With near-shoring becoming ever more prominent, and with the shale-oil revolution which has made the U.S the largest oil producer in the world, it makes sense for the U.S to question why they would need to spend billions of dollars in military expenditure annually without compensation for outcomes (oil security and access to cheap overseas labor) they don't really need anymore.

There will be serious ramifications to international trade if the U.S isolates itself and stops assuming its role as the policeman of international waters; everything from cargo-ship insurance to the cost of fuel will rise significantly. This means that the cost of all goods will increase for everyone, with some economies being hit harder than others.

Much of the economic benefit of the last 75 years will be challenged due to the demographic collapses within many economies - with the most consequential being China.

Large declines within the Chinese working-age population combined with developing nations increasing opposition towards China will result in reduced output for the country.

Chinese wages have also increased steadily over the years, and declines or even stagnation within the working age group will further increase Chinese wages, making Chinese manufacturing relatively less desirable.

The world relies on large industrial players (specifically Germany, but also Japan, South Korea, the UK, and Italy) that have aging populations for everything from automobiles, industrial equipment and pharmaceuticals.

In the cases of both China and Germany (and many other industrialized economies), the demographic structures are such that it is unlikely that the population can be maintained, since the bulk of women are already above the age of 35.

The consequence of such demographic collapses is that there will be a shrinking productive base (in the form of working age population) that will be increasingly directed to the provision of healthcare and aged-care services to meet the needs of an increasingly elderly population.

In the case of China, this will mean that productive capacity will have to be moved to other countries, many of which do not have the demographic and infrastructure related advantages China offers.

The ensuing collapse in the global population, coupled with the U.S' isolationist policy, points to one logical outcome: prolonged structural inflation in the cost of goods and services.

Just as the last 75 years saw the cost of goods decrease, everything will get more expensive in the foreseeable future.

However, asset values may fall in the intermediate period, as even capital will be harder to come by.

The cost of capital, which was at a 30+ year low, is now in the process of reversing course. Financing everything from homes to more productive capacity (that could cushion the inflationary forces) will become increasingly scarce.

Funnily enough, the reason I believe rates will continue to rise is because of demographics. The wealthiest countries that have rich baby boomer populations (who accumulated vast amounts of wealth during this past prosperous period) are now coming into retirement and will be depleting their savings.

Less available cash for loans or equity investment in the system will result in a higher cost of capital.

"Trees don't grow to the sky" is a common saying used by many in the investment realm. The changing tides are normal and part of a natural process.

The productive response is to think of ways to build wealth and secure yourself and your family during more trying times.

These are the types of topics that occupy my mind and that I would like to write about more frequently.

If you want to discuss the ideas I wrote about in this post, or any topic from business and economics to technology and history, please feel free to reach out.