Hockey Stick Growth: Good for the Wallet, Bad for the Globe

December 28th, 2011
by Jonathan Leidy

An old French riddle, “The 29th Day,” has become a very popular allegory for the potential perils of excessive population growth. It reads as follows:

Lily pads double once every day. There is a pond that, on the first day, has one lily pad floating in it. Assuming the pond will be completely covered by the 30th day, when is the pond half full with lily pads?

Although the knee-jerk reaction might be to blurt out the 15th day, the answer, as the name of the riddle implies, is the 29th day. The moral of the story is that exponential, or non-linear, growth is sneaky. One minute things appear manageable, even benign, when in fact we may be a mere “day” away from total saturation.

And with the world’s population toping 7 billion this year, it only seems fitting to future-cast a little, with a specific eye towards the effects that this global population explosion will likely have on investors’ portfolios.

What is Hockey Stick Growth?

“Hockey Stick” growth is a return pattern with an exponential kink. Below we see the kink in global population growth occurring at or around 1950. Prior to that point, more people were being born than were dying each year, but the rate at which the populous was growing was fairly steady. Combine the fall of the Third Reich with the rise of the American middle class, and domestic population growth kicked into high gear.

At the same time, emerging market countries, like China and India, were just beginning to boom. Fueled by the same sort of urban drift that dominated the first 30 years of the 20th century in America, China’s population grew from roughly 500 million in 1950 to 1.3 billion people today. Compare that to the last half of the 19th century, where China only added about 20 million people during that same time span. India fashioned a hockey stick of its own, adding more than 700 million people over the last 60 years.

By comparison, the US grew from 150 million to roughly 300 million people.

So What Does All this People-Making Mean?

For investors, the trend is quite promising. Population growth, specifically in developing nations with burgeoning middle classes, portends significant economic growth. That leads to the now somewhat hackneyed conclusion that emerging markets will make for good long-term investments. Nevertheless, the US and the rest of the developed world will continue to shrink in relative size, and hence global significance, over the next several decades; Emerging markets, and the multi-national corporations that work with them e.g. MacDonald’s, Tiffany’s, and Daimler-Benz, are likely to remain very attractive investments.

Another investment theme that will probably be rewarding is the increasing scarcity of commodities. In a standard supply and demand economy, scarcity dictates price. So even if you are not a Malthusian Doomsdayer of the nth order, logic suggests that buying your share of the world’s resources (including real estate) today, will likely pay off tomorrow. Similarly, infrastructure investments, specifically in countries like Brazil (host of the 2014 World Cup and 2016 Summer Olympics), also seem sensible.

In several decades the world’s population will not only be larger, it will be significantly older as well. As the table below suggests, populations across every time zone will be aging, leading to probable upswings in the healthcare and biotech industries. Imagine… in 40 years, rest homes may be more overcrowded than prisons.

Within the next several decades new territories of cheap labor will also be fledged. As China and India ascend, Africa and Central/South America will look to take their place as the next set of strong backs upon which the global economy will be built. These new emerging market economies will likely experience increased stability and productivity that will in turn attract capital.

Of course all of this growth will not come without consequences. And just like the riddle suggests, what appears relatively innocuous on the 29th Day can be nothing short of toxic on the 30th. Whether measured by carrying capacity or ecological footprint, the Earth’s maximum population threshold is rapidly approaching. In fact, some scientists estimate that humans were already consuming at a rate 20% above long-term sustainability at the turn of the millennium.

In order to address this ecological predicament, mankind will need to innovate. Many of the fledgling renewable alternatives like solar, wind, and tidal are certain to play a greater role in the world’s energy fabric. Similarly waste management and recycling technologies will become a bigger part of the economy in the future, as will simple space-saving solutions and transportation mechanisms for densely populated areas.

However, population growth must be vigilantly monitored. For just as markets and asset classes exhibit mean reversion, or gravitation towards their long-term averages, so might global population. And despite mankind’s seemingly endless ability to manufacturing greater and greater efficiencies, some forces, like those of Mother Nature, might not ultimately be able to be out-engineered.

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