Fund Investing

Larry Siegel's reasoned rebuttal to the economic doomsayers
By Michael Ryval | 16/04/13

Conventional wisdom has it that the world is in a sorry state, and only getting worse, due to unchecked population growth and the continued degradation of the environment.

About the Author
Michael Ryval, a regular contributor to Morningstar, is a Toronto-based freelance writer who specializes in business and investing.

That pessimistic view is entirely wrong, argues Laurence (Larry) Siegel, the Wilmette, Illinois-based director of research at the Research Foundation of the CFA Institute. In fact, Siegel, who has spent 36 years on the consulting and management side of the investment industry and authored or co-edited several books on finance, loves to tackle proponents of bleak forecasts, such as money manager Jeremy Grantham and economist Robert Gordon.

The long-run global outlook is far brighter than pessimists claim, says Siegel, who will be one of the speakers at the Morningstar Investment Conference in Toronto on June 5."Anyone who thinks that economic conditions around the world have gotten worse is really not paying attention or has an ideological axe to grind."

Through his presentation, described as "Fewer, richer, greener," and the title of an article published in the November-December 2012 issue of Financial Analysts Journal, Siegel will argue that as population growth stabilizes, the world will see higher per-capita incomes, which will foster greater sensitivity to the environment.

"For the first time in world history, a modest degree of affluence has become the norm rather than the rare exception," says Siegel. "The world average GDP per capita, on a purchasing-power-parity (PPP) basis, is about US$12,000 a year. That was the U.S. GDP per capita around 1946-47, when we were indisputably a first-world country."

And there is "absolutely" no reason why this trend will not continue, adds Siegel, who spent 15 years as director of research at the US$11-billion Ford Foundation. Before that, he was managing director at Ibbotson Associates (now a division of Morningstar), which he helped to establish in 1979. "Resources have always been expensive and hard to get. It was not that long ago that we lit our lamps with oil extracted from the blubber of whales. But when we state natural-resource prices and availability in terms of the human effort needed to procure the resources, we see that they have been getting cheaper. Changes in technology [in the future] will cause this trend to continue almost indefinitely."

Larry Siegel

Siegel notes that there is a long history of intellectuals who have said, in essence, that the world is coming to an end. "What we are hearing now is two stories," says Siegel. "First, the economy will never again grow at a robust rate. And, second, the presence of human beings on Earth is destroying the environment. These are both ridiculous and tied to each other."

In Siegel's view, a greener planet will be achieved by rising personal incomes and the world becoming richer. "We in the U.S., Canada, Australia, the UK and other developed countries have achieved a level of income that is consistent with environmental protection. Much of the rest of the world has not---but it is getting there. The last thing you want to do is stop now, when many countries such as China are at the point of maximum environmental impact."

China, he notes, has a per capita GDP of about US$9,000 on a PPP basis. "That is the sweet spot for destroying the environment. At a lower standard of living, they don't consume enough to make an impact. But at a higher standard of living, people pay for environmental protection -- as a consumer good."

Siegel points to the environmental movement in the U.S. that got its start in 1872 when President Ulysses S. Grant established Yellowstone, the first national park, and had a major push when President Theodore Roosevelt sponsored or created other national parks. The landmark Clean Air Act in 1970 was another important step in the same direction that coincided with rising living standards.

"If China has the kind of growth it is planning for, they will experience what developed countries have experienced. That is a shift in priorities, from very rapid industrialization to developing in ways as to protect environmental values," says Siegel, who earned an MBA in finance from the University of Chicago in 1977 and is the author of Benchmarks and Investment Management. "We want to encourage that. India is behind, but not that far. Maybe 20 years."

The trend to a greener planet will occur, says Siegel, mainly because population growth is already slowing. China, for instance, is seeing the impact of its one-child policy in that the fertility rate is less than what is required to maintain the population. Even India has seen a rapid decline in population growth as the fertility rate has dropped from 5.9 children per woman (in 1950-55) to 2.7 children. It is a trend that is happening globally as global fertility rates have been halved in the last 50 years.

The consequence of this pattern, says Siegel, is that "the population explosion is about over. After doubling upon doubling of the world population, which went from 1.5 billion in 1900 to seven billion in 2010, one more increase of 50% is expected by end of this century. Then the population will be stable, or start to decline. The stabilization of the population makes it easier to solve environment problems."

In adopting a positive outlook for the future of the global economy, Siegel looks to the past in which the industrialized world made huge advances in wealth because of creativity and innovation. "Most important, creativity and invention have not stopped, but on the contrary, seem to be accelerating further," Siegel says.

Indeed, as global populations stabilize, the most dramatic changes in per capita incomes will occur in developing countries. Citing a study done by Goldman Sachs, Siegel forecasts that GDP per capita in China on a PPP-adjusted basis will increase almost seven-fold from US$7,600 in 2010, to US$49,650 in 2050. Similarly, individual incomes in Brazil will rise to US$49,759 in 2050, compared to US$10,800 in 2010.

Siegel's thesis of a greener, richer world has implications for advisors and investors. "First, don't give up on equities. Until recently, people were saying, 'Equities are dead.' They're not dead. But bonds are dead," says Siegel. "You're locking in very low yields for a long time. If there is unexpected inflation, you will lose principal in real terms. If there is a lot of inflation, then nominal yields will become negative real yields -- and you'll lose money. But if we don't have inflation, nominal yields will still be very low. In the best-case scenario, a 2% yield will be just that, 2%. We could have deflation, but for now there is no evidence of it." He also sees positive returns for commodities, preferring stocks over the underlying resources because they are easier and less risky to invest in.

Is Siegel an iconoclast, challenging pessimists who see very dark days ahead? Not quite. "I'm a skeptic -- and the voice of reason. I'm saying, 'Look at the data.' The standard of living in almost every country, with a few exceptions, has changed radically in recent memory. There is no reason to think that change is over."

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