The Next Black Swan: Global Depopulation

We’ve all heard the thesis on real estate investing: “They’re not making any more land.” It turns out that before too long we may not be making enough people either.

Global population has been expanding since antiquity, interrupted by wars, disasters, pandemics, and famine. Malthusian predictions of overpopulation, unsustainability, and resource depletion have also been a part of conventional wisdom since antiquity and remain popular today (see Paul Gilding’s “The Earth is Full” TED talk). It is, after all, a common trait of the human mind to assume that the past is an accurate predictor of the future.

In contrast with these apocalyptic forecasts, over 40% of the world’s population live in nations with sub-replacement fertility (defined as any rate below 2.1 children per woman)—a common feature among the most prosperous countries. The population is already declining in many other countriesincluding ChinaBrazilGermanyJapanItaly, Singapore, Hong Kong, Hungary, Latvia, Lithuania, Bulgaria, Moldova, Estonia, Kazakhstan, Georgia, Armenia, Bosnia, Croatia, Slovenia, Ukraine, and Belarus. Much more are on the brink. The total population of the continent of Europe, including Russia and non-EU countries, peaked in the year 2000.

For some developed countries such as the United States, sub-replacement fertility is being masked by immigration from poorer countries that are still growing in population.  However, the number of such developing countries is shrinking as they convert to developed status. Moreover, a report by the Foreign Policy Research Institute states that the phenomenon of sub-replacement fertility rates is rapidly spreading to developing countries.  Should all of these trends continue global population will peak–but then experience a secular decline.

The potential consequences of global depopulation could be substantial, and many could be quite positive. Stress on infrastructure and services would diminish. Land might be abandoned and natural habitats could reappear, along with fauna and flora. What happens to the war over natural resources when the most scarce one of all is human resources?

For investors, the impact on asset prices could be striking. Competition and demand for natural resources such as water, minerals, and oil could wane, leading to deflationary pressure on commodity prices. Real estate prices and debt would also face similar situations. Much would depend on whether the central banks would choose to allow low-grade deflation or otherwise continue to target low-grade inflation in the face of declining aggregate demand.

Where would yield be found in a depopulating world facing the forces of deflation? Bonds would have a low supply of issuers, high-demand, and a negligible yield. Buildings provide a rent yield, while land provides crop yields. Gold and commodities have negative yields due to storage costs. Stocks—equity ownership in human endeavor—could be the best place to find yield, especially in segments such as healthcare, an industry that will benefit from the rapidly rising average age of the population, accompanied by falling fertility rates.  Whatever the strategy may be, it would be prudent for institutions with long-term investment horizons to devote a small but material allocation to the depopulation hypothesis as a hedge against their overall portfolio.

Strikingly, global depopulation risk is not baked into any investment manager’s model today. Although current data and trends suggest the possibility of global depopulation on the horizon, it is priced at zero today. The long history of investing has shown that low-probability, high-sigma scenarios currently priced by the market at zero can yield windfall profits. Even though many investors talk about Nassim Taleb’s The Black Swan: the Impact of the Highly Improbable, you know the market will still miss the next big trend hiding in plain sight.

Originally published on on December 6, 2012.