The Dollar, Population and Productivity

The Dollar

The US dollar has soared in value recently to a multi-decade peak. The Euro is at parity for the first time in twenty years and the British Pound is getting closer to parity, something that happened only once for a very brief period in the 80’s. There are big shifts happening in all markets, and the currency market is no exception.

As of today, we are unlikely to see a full yield curve inversion by the next Fed meeting (Sept 21) because the 10-year treasury yield has increased enough to prevent it for now. For context, the yield curve inversion is a significant recession indicator. The futures market is still betting on a .75% increase of the Fed Funds rate to 3.25%, the highest since the global financial crisis. Notably, the futures market expects a peak of 4.00% on the Fed Funds rate, followed by a decline to a range between 2-3% in 2025 and beyond. You can see this data here.

The Fed is hiking rates to tame inflation, so if inflation comes down in 2023 and stays down, that opens the door to lower rates. These things take time.

In the meantime, commodity market prices have fallen dramatically from their 2022 peaks. One has to wonder if the prices will break their previous peaks in 2023, or will we see negative inflation numbers next year in categories like gasoline, corn, wheat, lumber, freight, oil, used cars, or even the median home price which is down 6% from the June peak. The one major inflation holdout is rent, which remains at an all-time high and represents a large percentage of the CPI and PCE.

As we’ve seen, panic level prices of both highs and lows never last as long as you think. The global economy is still processing the aftershocks of abruptly shutting down and restarting. I haven’t seen many headlines about the potential for negative inflation rates next year, but given the extreme recent price highs and declines, I don’t think it’s entirely off the table.

Population + Productivity

South Korea made headlines recently for the lowest birth rate in the world at .81 new births per female. That’s down from 6.1 in 1960, 60 years ago. Their working age population (15-64) has declined gradually since 2017. The UN projects South Korea’s population to fall by approximately -50% over the next 60 years, but that projection is so extreme that I would dismiss it entirely. Japan, where the median age is 48 years old, has experienced slight population decreases since its peak in 2008.

In case you’re curious, the US has a median age of 37 and a 1.7 fertility rate (slightly below the replacement rate). The positive net immigration rate keeps the US population growing. The US is one of just two countries in the top 10 by population with a positive net migration rate. The other is Russia, but I would recommend double-checking that statistic next year.

Overall, the global population is expected to increase by 1 billion people over the next 15 years. The falling replacement rate is offset by longer life spans and countries in Africa with exceptionally high fertility rates.

Why is population growth important as a macro theme? GDP growth consists of population growth, productivity growth and inflation. If the population stops growing, it’s more difficult to grow GDP. Growth through inflation is not considered real growth, so in many cases, we have to rely on productivity gains enabled by technology in order to realize significant increases in GDP.

The future growth of our globally interconnected population and economy looks more like Metcalfe’s law and less like the economics of the pre-internet age. Any population growth, however small, has the potential to translate to exponential economic growth thanks to the internet.

In the meantime, when it comes to productivity growth, Discount Tire, the largest independent tire and wheel retailer with over 1,000 stores nationwide, installed its first RoboTire system in Arizona last month. The system can replace four tires in 25 minutes, about half of the normal time. This is a perfect use case for robotics and automation.

Another productivity example has to do with precision simulation training environments like the ones run by companies like NVidia. These training environments replicate physics and machine vision down to the individual robotic components to train robots to interact with their environment under all scenarios. Simulation training dramatically speeds up the time for robots to prepare for their real-world tasks.

In the short run, panics, capital markets issues, wars, bad policy, runaway inflation and pandemics will temporarily disrupt progress.