An Examination of the Long-Term Growth Potential of Stock Markets and ETFs

Finanzbär

Introduction [0:00]

• The video explores the fundamental question of whether stock markets and Exchange Traded Funds (ETFs) can experience infinite growth.
• Investing in globally diversified equity ETFs is a common strategy based on the expectation of positive returns, typically an average of 7-8% annually historically [0:00].
• The discussion emphasizes the importance of a long-term investment horizon (20-40 years) and critically examines whether these historical performance trends are sustainable into the future.

Background of the Question [0:54]

• Saving money alone is insufficient for wealth building due to inflation; active investment is crucial [0:54].
• Globally diversified equity ETFs are highlighted as popular and effective investment instruments.
• The expectation of positive returns from these investments is largely based on strong historical return data, often showing an upward trend over market cycles [1:58].
• However, the video explicitly warns against using historical data and past returns as a guaranteed predictor for future performance.
• While market cycles include downturns, the long-term trend of the MSCI World Index has shown an upward trajectory.

Our Money System / Inflation [2:54]

• Inflation as a Constant Factor:
  • Inflation is an undeniable reality for investors, and its impact on purchasing power needs to be considered [2:54].
  • An illustrative example [3:20] shows that with 3-4% inflation, €100,000 can lose 44-46% of its purchasing power over 20 years.
• Expansion of Global Money Supply:
  • The "Global M2 Money Supply" chart [3:59] reveals a steady and, at times, explosive increase in the global amount of currencies, particularly in the US during the COVID-19 pandemic [4:06][4:31].
  • This growing money supply means that individual currency units (e.g., Euros or Dollars) inherently lose purchasing power over time.
• Corporate Response to Inflation:
  • Businesses respond to rising costs (employee wages, raw materials, etc.) by increasing the prices of their goods and services.
  • This leads to higher nominal sales and profits for companies.
• Correlation with Stock Market Performance:
  • There is a noticeable correlation between the increase in the M2 money supply and the growth of stock market indices like the S&P 500.
  • Governments, through central banks (like the ECB's target of 2% inflation per year), actively manage money supply and inflation, partly to devalue their accumulated sovereign debts over time.
• Outlook: As long as this monetary system remains unchanged, it creates an environment where companies' nominal values and, consequently, stock and ETF prices, are likely to continue rising.

Growth Drivers: Consumption [5:00]

• Human Desire and Consumption: A fundamental driver of economic growth is the human desire to acquire more goods and services, which directly boosts company revenues and profits [5:12].
• Rising Global Prosperity:
  • Many regions of the world, particularly emerging markets, are still in the early stages of significant economic development and increasing consumption.
  • Charts illustrating the distribution of global population across different poverty thresholds from 1990 to 2024 show a substantial increase in the number of people living above $10 a day.
• Case Studies: China and India:
  • China has seen a rapid increase in the number of people able to afford more luxury items, reflecting a massive shift in consumer behavior.
  • India, while needing more time, is also on a clear path towards similar consumption growth.
• Long-Term Potential: This structural shift towards greater prosperity and consumption in vast populations promises a powerful and sustained boost to global economic growth for decades.
• Addressing the "Glass Ceiling" Argument:
  • Critics suggest that consumption growth will eventually plateau when basic needs are met (e.g., everyone has a home, car, phone, food, and can travel).
  • The video counters that this saturation point is a distant future globally, and human nature's continuous desire for improvement and new experiences prevents true stagnation.

Growth Drivers: Population [6:27]

• Historical Population Boom: Over the last 70 years, the world population has grown from under 3 billion to over 8 billion, serving as a key engine for global economic expansion [6:27].
• Continued Growth in the Near Future:
  • Projections indicate that the global population will continue to grow, reaching over 10 billion by approximately 2100.
  • This ongoing increase in the number of consumers will sustain demand for products and services.
• Concerns about Future Decline:
  • Figures like Elon Musk frequently warn about a looming "population collapse" due to falling global fertility rates [6:59].
  • Data shows that fertility rates in major economic regions (e.g., UK, US, Japan, Euro Area, and even India) have fallen below the replacement rate of 2.1 births per woman, necessary to maintain a stable population.
  • This trend, while taking one to two generations to fully manifest its impact, suggests a significant population decrease could occur within a century in some regions.
• Relevance to Investment Horizons:
  • Although a population decline is a long-term demographic concern, its most severe effects are projected for a period beyond the typical investment horizons (20-40 years) of most current investors and even their children.
  • Therefore, for the foreseeable future within relevant investment timelines, population growth is still considered a positive economic factor.

Growth Drivers: Innovation [8:05]

• Continuous Human Advancement: History demonstrates humanity's relentless progress through innovation, marked by successive industrial revolutions (e.g., from mechanization in Industry 1.0 to cyber-physical systems in Industry 4.0) [8:10].
• Future Technological Impact:
  • Emerging technologies, particularly Artificial Intelligence (AI) and robotics, are poised to bring about profound changes and drive further economic advancement.
  • The rapid improvement in AI models, as shown by the Artificial Analysis Intelligence Index, underscores this accelerating trend.
• Efficiency and Productivity Gains:
  • Innovation enables more efficient resource utilization, allowing for greater output from fewer inputs.
  • Concepts like recycling further enhance resource efficiency.
• Sustained Wealth Creation: As long as humanity continues to innovate, leading to faster, simpler, better, larger, or smaller ways of doing things, global wealth and economic growth are expected to be continuously boosted.

Is Growth at all Necessary? [8:33]

• Value Creation Beyond Direct Growth: Companies can increase shareholder value even if their overall sales or profits are no longer growing [8:33].
• Example: The Apple Farmer Analogy:
  • Consider a farmer who has maximized apple sales at a fixed price, with stagnant overall revenue [8:47].
  • To increase value, the farmer can:
    • Improve Efficiency: Invest in a harvesting machine to reduce labor costs, increasing profit per apple without increasing sales volume.
    • Share Buybacks: The company can use its profits to buy back its own shares from the market.
      • If a company earns €100 annually with 1,000 shares outstanding, buying back 30 shares (for €30) means the €100 profit is now divided among 970 shares.
      • This increases the earnings per share and, theoretically, the dividend per share.
      • This process, if the percentage of shares bought back exceeds any decline in overall profit, can theoretically drive the stock price towards infinity.
  • Conclusion: Even in a scenario of zero overall growth, a company can still generate value for its shareholders through efficiency gains, dividend payouts, and share buybacks.

Financial Scientific Consideration [10:44]

• Return Comes From Risk: A core principle in finance is that investors are compensated for taking on risk. A higher perceived risk generally demands a higher potential return [10:52].
• Market Dynamics and Investor Behavior:
  • If expected stock market returns were to significantly decrease (e.g., from 8-9% to 5-7% per year), investors would likely withdraw capital from the stock market due to insufficient compensation for risk.
  • This outflow of capital would cause stock prices to fall, making them more attractive again and thus increasing the potential returns for future investors.
  • Conversely, if too many investors flock to stocks, the increased demand could depress future returns.
• Long-Term Return Expectation: This self-regulating mechanism suggests that as long as there are viable companies, there will be a return for owning their shares, even if the average returns fluctuate and might be lower in the future than they have been historically.

Conclusion [11:55]

• Assumptions and Sound Judgment: The points discussed are based on assumptions and hypotheses. It is always wise to apply a dose of common sense [11:55].
• Focus on Controllables: It is most beneficial to focus on aspects that are within an individual's control [12:35].
  • No one can predict the future with certainty.
  • Historically, stocks have performed well over the long term.
  • Current economic systems are structured in a way that continues to favor long-term equity investment.
• Stocks as the Best Alternative:
  • Given the available information, the asset class of equities (particularly broad-market ETFs) remains the most compelling option for long-term wealth accumulation. The video states "Stocks are indispensable" [12:07].
  • If stock and ETF prices were to plummet to extremely low levels by 2050-2070, the global economy would likely face much more severe issues than just declining investment returns. In such a scenario, other traditional investments like gold, real estate, or government bonds might also become worthless.
• Risk Management through Diversification: For those who want to hedge against extreme systemic risks, diversifying investments into other assets like gold, Bitcoin, or farmland can be considered.