There’s a lot of debate right now about whether this is a 1995-like relentless bull market, a 1999 or 2007-type rally before the crash, or even an early 1980’s-type early stage bull market. It’s none of those.
If there’s one chart that sums up the post-2008 world, which could last another 20 years, it’s this one, the peak age labor force:
It’s been flat since 2000, and barring a surge of immigration or increases in the labor force participation rate, it’s not likely to grow much over the next 10-20 years. It’s the same story in Japan, Europe, Russia, soon China, and eventually the whole world as birth rates crash towards replacement level or below everywhere.
The history of capitalism is, not surprisingly, the history of the moneyed class borrowing money to hire workers to build more capital, whether it be coal mines, oil wells, steel mills, factories, rails, roads, skyscrapers, houses, office towers, ships, trains, cars, airplanes, satellites, computers, smartphones, or restaurants.
But if the peak age labor force has stopped growing, then we don’t really need to build any new physical capital to handle future population growth, all we need to do is replace existing capital when it wears out or becomes obsolete. And economic growth increasingly seems to be heavy on intellectual capital rather than physical capital — cloud-based infrastructure and data systems, not railroads, roads, or skyscrapers.
As a result, fixed private investment to GDP, even after 3 years of recovery, remains near 60-year lows:
The mean level of fixed private investment to GDP from 1950-2007 was 15.5%. As of Q1 2013 it’s at 13.1%. Let’s say that going forward, thanks to a fairly stagnant labor force, it’s 1-2% lower. All else equal, that should keep the unemployment rate 1-2% higher than it was before, as seen in this chart of fixed private investment to GDP overlaid against the inverted unemployment rate.
So instead of allocating an extra 1-2% of GDP to fixed investment (and hence employment/labor) every year to build out more capital, or roughly $150-300 billion in 2013 dollars, companies are either sitting on that cash, buying back stock, or bidding up existing capital. This is where the 1%/99% (capital vs labor) animosity stems from.
There’s no reason why we can’t have a functioning economic system in a world with not much population or fixed capital growth. But capitalism as we’ve known it depended on an unspoken bargain between capital and labor where capital would maintain levels of employment by always building more capital for the future, employing workers who were building out that capital, and requiring financing from the credit markets, ensuring that lenders (and senior citizens with savings to allocate) would earn a rate of return on their savings.
To Baby Boomers who believe that hard work is the answer to all of society’s ills, any rethinking of the existing order will never achieve majority consensus, but as they age out of the electorate and are replaced by younger voters with different values and experiences, different arrangements (Obamacare, increased government investment, tax reform, basic income, etc) will be debated.
In the meantime, it’s never been a better time to be an investor, with very few uneconomic projects being undertaken, no inflation/wage growth pressures, and robust profits from existing sources of capital.