On Future Economic Growth Rates; The Top Three Spices to Prevent DNA Damage!

From: aditya rana
Date: Sat, Jan 31, 2015 at 2:12 PM
Subject: On Future Economic Growth Rates; The Top Three Spices to Prevent DNA Damage!

Hi!,

Having a framework to formulate views on future GDP growth rates of countries and regions is important for developing a global asset allocation strategy, since future GDP growth rates are an important driver of equity returns (as demonstrated by the work of Dimson, Marsh and Staunton which was summarised in a previous newsletter). The investment advisory firm Research Affiliates, with a focus on developing asset allocation strategies which have about $177 billion dedicated to them globally, wrote an insightful note recently which provides a somewhat unique way of looking at the drivers of GDP growth rates and the prospects for growth across countries going forward. To summarise:

-The biggest and most important investment opportunity is long-term mean reversion in asset returns, with the short-term being driven by noise, fanciful projections and bogus theories.

-Similarly, short-term fluctuations in GDP are usually just temporary deviations from the long-term stable growth path, and are given undue attention by the media. The -2.9% growth in U.S. GDP during the first quarter of 2014, followed by a 4% annualized growth rate for the second and third quarters, masks the underlying anaemic growth rate of 2% realised during the first nine months of 2014.

-The four main drivers of GDP growth can be formulated as:

Real GDP growth = Productivity + a * Physical Capital + (1 – a) * (Workers + Human Capital).

-All the variables in the formula are growth rates besides alpha (a), which is the share of national income going to owners of capital, while (1-a) is the share which goes to labour.

-GDP growth can therefore be seen as a result of an industrious and educated workers together with machines and equipment. Productivity arises from technological progress and efficiency of production, while human capital represents the contribution made by advances in education.

-Estimating the contribution of each of the above four factors to future GDP growth is a tricky exercise, as their impact is time varying. Decomposing the growth rate of the U.S. over the last six years (see chart below) we can clearly see that from the ‘60s until the ‘80s, advances in education and strong demographics contributed to more than half of the total growth rate.

-From the ‘80s, the demographic dividend faded as all the baby boomers had already entered the workforce, but was fortunately offset by the extraordinary advances in technology (driven by the progressive incorporation of the internet into work) which fuelled more than 40% of total growth. However, current research argues that this technological progress will be difficult to replicate in the future.

-It is important to note that the above factors are inter-related – capital accumulation is dependent on productivity and demographics, as investors would be reluctant to invest in a country which has reached its productivity peak and has a shrinking pool of workers. In addition, a country’s productivity growth is closely tied to the demographic profile of its workers, while experienced workers have the highest productivity rates it is the younger workers which have the highest growth rates in productivity which matters more for GDP growth and asset returns.

-Other developed countries (see chart below) , and in particular Europe, suffer from being mature economies with large debts, high taxes and restrictive labour laws leading to low growth rates over the last decade. Japan faces a significant demographic headwind with a shrinking workforce which is likely to lead to a decline in future productivity.

-By contrast, the BRIC countries have enjoyed high growth rates, driven by large productivity gains and a fast growing labour force, with a younger population building a new urban middle class. However, the BRIC countries also illustrate important differences.

-China has been the big outlier, with spectacular growth driven by both productivity gains and high investments in physical capital, as a more efficient private sector overtook the government to become the largest player in the economy. Brazil also successfully introduced economic reforms under President Silva and were able to leverage the commodity boom led by China growth. However, Russia, India and South Africa achieved less than their potential, with Russia showing huge gains in productivity in the aftermath of centralized planning, but failing to diversify away from the energy sector and strengthen the rule of law.

-The outlook for the U.S., despite being in the forefront of world technological innovation and having an efficient financial sector which can channel capital to productive uses, is growth barely reaching a 1.5% level over the next few decades. Human capital growth will approach zero, and the labour force growth will continue to decline as more baby bombers retire, which will have an adverse affect on productivity growth and capital accumulation. Productivity growth could contribute only a third of the 1% seen in the past, and capital accumulation could permanently drop to below 1%.

-The outlook for the rest of the developed world in even more bleak, with Japan trying to solve deep structural issues with monetary policy, and the ability to generate higher inflation with bond purchases is uncertain. Europe remains mired in a flawed monetary union, with diverse economies having little willingness to make the necessary sacrifices. The Euro remains overvalued for the peripheral members, and unless Germany is willing to have a more stimulative monetary policy, the only option for the peripheral economies is to have internal devaluation to regain competitiveness.

-The bright hope in a world of slowing growth, are the poorer countries which have better prospects for strong growth than the rich countries. The convergence hypothesis states that each country, over the long run, is likely to reach a balanced path of growth determined by global technology and country-specific factors like institutional quality, politics and demographic profile, implying eventual convergence with the most developed economies.

-The striking example of this at work is China, which has experienced unprecedented growth rates over the last 30 years. As the graph below illustrates, the relative GDP per capita of an emerging market explains about 31% of its real GDP growth rate over the subsequent 20 years. While, there will be large variances in the individual growth rates of EM countries based on country specific factors, the aggregate growth rate should far exceed the growth rates in the developed world.

-Research has shown that equity and bond returns have been higher in fast growing economies, as higher real GDP growth translates in higher real interest rates which, over time, are associated with higher equity returns. However, short-term fluctuations are inevitable, and the investor needs to cut through the noise and focus on the longer-term which implies better prospects for the emerging world than the developed world.

Interesting way to look at GDP growth prospects and further validates the point I have made consistently in my newsletters – that the EM world in general (and China and India in particular) offer superior economic growth and asset return prospects than the developed world over the long run. Asset portfolios should be weighted accordingly, subject to individual constraints and requirements.

Regarding convergence of poorer countries to the richer ones, Paul Krugman had an illuminating note recently:

-“If you know your long-run history of world trade, you know that we’re living in the second global economy. The first, based on telegraphs, railroads, and steamships, flourished from around 1870 to World War I, then was shut down by war and protectionism. The second emerged after World War II, but gradually; remarkably, trade as a share of world income didn’t reach 1913 levels until the 1970s, and it wasn’t until after 1990 that “hyperglobalization” driven by breaking up the value chain — and also the first large-scale trade in services — took globalization to a level our great-grandfathers didn’t know.

-So here’s a question: have the forces leading to convergence or divergence among nations returned the same as they had before? And the answer seems to be no.

-First, here’s initial GDP per capita and growth thereof over the two decades before World War I, with a few countries labeled. Two things do seem to be clear. First, there was no sign of a tendency toward convergence, for poorer countries to grow faster. Second, really fast growth by the standards of the era took place in resource-rich economies.

Now do the same thing for 1990-2010:

-Several points: First, top growth rates have gotten much higher — presumably because the technological frontier is so much further out, so countries can really grow fast via catch-up. Second, there’s a huge spread in growth rates among poor countries — but that largely reflects noneconomic factors, mainly war external and civil (plus negative growth in much of the former Soviet Union, again about social disruption). Some of the high growth rates reflect recovery from chaos, but for the most part not; instead, we’re witnessing successful catch-up. And of course the really big countries in that group mean that we’re looking at a very large number of people.

I do think there’s something systematic here; the Summers-Pritchett work on regression toward the mean is a useful corrective to over-interpretation and extrapolation, but is a bit too nihilist for my tastes.”

Top Three DNA protecting Herbs:

Interesting note from Dr. Greger (http://nutritionfacts.org/2015/01/22) on which are the best herbs to protect against DNA damage:

-“I had earlier profiled a landmark study that compared the ability of different spices to suppress inflammation. The study also compared the spices’ ability to protect DNA. Cloves, ginger, rosemary, and turmeric were able to significantly stifle the inflammatory response, but can they also protect DNA?

-If a tissue sample is taken from a random person, about 7% of their cells may show evidence of DNA damage, actual breaks in the strands of their DNA. If we then blast those cells with free radicals, we can bring that number up to 10%. But if the person has been eating ginger for a week, DNA damage drops to just 8%. Those who hadn’t been eating any herbs or spices were vulnerable to DNA damage from oxidative stress. But just including ginger in our diet may cut that damage by 25%—the same with rosemary.

-Turmeric is even more powerful—DNA damage was cut in half. And this was not just mixing turmeric with cells in some petri dish: This is comparing what happens when you expose the cells of spice eaters versus the cells of non-spice eaters to free radicals and count the DNA fracture rates.

-And not only did the turmeric work significantly better, but it did so at a significantly smaller dose. One and a third teaspoons a day of ginger or rosemary was compared to practically just a pinch of turmeric (about an eighth of a teaspoon a day)—that’s how powerful the stuff is. Counting the DNA breaks in people’s cells before and after a week of spices without the free radical blast revealed no significant intrinsic protection in the ginger or rosemary groups. However, the turmeric still appeared to reduce DNA damage by half.

-This may be because curcumin is not just an antioxidant—it also boosts the activity of the body’s own antioxidant enzymes. Catalase is one of the most active enzymes in the body: each one can detoxify millions of free radicals per second. If we consume the equivalent of about three quarters of a teaspoon of turmeric a day, the activity of this enzyme in our bloodstream gets boosted by 75%!

-I suggest cooking with it rather than, for example, just throwing it in a smoothie. Why? Because this effect was found specifically for heat-treated turmeric. In practice, many herbs and spices are only consumed after cooking, so the researchers tested turmeric and oregano in both raw and cooked forms. In terms of DNA damage, the results from raw turmeric did not reach statistical significance. However, the opposite was found for its anti-inflammatory effects. So we might want to eat it both ways.

“Practical recommendations for obtaining curcumin in the diet might be to add turmeric to sweet dishes containing cinnamon and ginger.” We can also cook with curry powder or turmeric itself. The researchers suggest something called “turmeric milk,” which is a traditional Indian elixir made with milk, turmeric powder, and sugar.”

In addition to the above suggestions (and as detailed in a previous note) having turmeric with honey or even plain hot water can be very helpful to treat respiratory diseases and enhance the immune system.

Here’s to spicing up your life, and making it healthier, with turmeric – and other herbs!

Regards,

Aditya

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