- Research supports a demographic nightmare to sieze the globe around 2020, with the US as the only major exception.
- This will challenge globalization, which should theoretically allocate resources effectively to mitigate demographic imbalances. In practice, a perfectly fluid globalization is scarcely attainable, and neo-nationalist protectionism will prevail.
I credit my greatest professional mentor for turning my attention to demographic economics, the first chapter of my lesson in behavioral economics. The economic models that bludgeoned me throughout college were too static, too dry, and too impractical to inspire anything but my utter disinterest. So right out of college, I entered the Private Wealth business with little enthusiasm for finance.
I was an associate at first, with my time allocated to admin for two advisors and equity analysis (data crunching) for a third advisor. Trying to exceed expectations for these analysis assignments, I spent a lot of late nights in the office, which really let me refine my Market aptitude. I would've failed to launch, however, if it hadn't been for this third advisor, my mentor, who accompanied me many of these nights. While we ate takeout dinners at our desks, he'd pop sushi into his mouth with one hand while clicking a mouse with the other: he'd print piles of news, views, and analysis for me to take home, then we'd discuss & debate the material the next night. I still don't know whether he tapped my intellectual curiosity or if he just sowed it, but either way, we enjoyed a cerebral camaraderie that few others in our business cared for.
We talked a lot about Harry Dent and his economic views per demographic research. Mr. Dent's views are often strikingly accurate yet strikingly mis-timed. Nonetheless, he's credited for the theory of the "baby boomer spending wave theory," which held that the stock-market should peak sometime between 2007 and 2009, based on his observation that spending peaks at around age 50 for individuals.
To this day, I still read Mr. Dent's outputs, but I'm ever-wary to digest his data, not his interpretation. From his data (and lots of others'), I've formulated my own economic outlook for the next decade. I've mentioned this in newsletters to clients and in roundtable discussions with colleagues:
I’m not a big proponent for stimulus, because I think disinflation since the Volker Fed has been the driving force of real growth in the mature US economy, and at some point we need to generate organic growth. We also need to recognize the headwinds of population demographics and the inevitability that real growth isn’t sustainable in perpetuity. There’s such a thing in corporate finance as “sustainable growth rate,” and it certainly resonates to sovereign finance. There’s no economic model to gauge the psychological breaking point at which an international reserve currency (the USD) folds under a certain Debt:GDP ratio. For my kids’ sake, however, I don’t care to test it.
The economy and interest rates will remain pinned through the hotspot of ARM resets in 2012. That's when our government's policy actions today will have an opportunity to affect economic performance. Unable to stand on its own, the economy will lack organic resolve through the 2017 pension liability "underwatering"--until demographics rally back 2018-2020.
So yesterday, when I read John Mauldin's reprise of a Niel Howe & Richard Jackson piece, "Global Aging and the Crisis of the 2020s," I was happy to hear the echo of my own opinions. Messrs. Howe & Jackson state:
...assuming no increase in fertility... Falling birthrates are not only transforming traditional population pyramids, leaving them top-heavy with elders, but are also ushering in a new era of workforce and population decline. The working-age population has already begun to contract in several large developed countries, including Germany and Japan. By 2030, it will be stagnant or contracting in nearly all developed countries, the only major exception being the United States... Unless immigration or birthrates surge, Japan and some European nations are on track to lose nearly one-half of their total current populations by the end of the century.
First, they admit that their fertility extrapolation is a huge weakness of the long-term forecast. Nevertheless, with 2020 as their fulcrum, no outbreak in fertility will materially affect their analysis of the next ten years, to wit:
During the 2020s, the developing world will be buffeted by its own potentially destabilizing demographic storms. China will face a massive age wave that could slow economic growth and precipitate political crisis just as that country is overtaking America as the world’s leading economic power. Russia will be in the midst of the steepest and most protracted population implosion of any major power since the plague-ridden Middle Ages. Meanwhile, many other developing countries, especially in the Muslim world, will experience a sudden new resurgence of youth whose aspirations they are unlikely to be able to meet...
...the outlook in the United States will increasingly diverge from that in the rest of the developed world. Yes, America is also graying, but to a lesser extent... Its working-age population, according to both US Census Bureau and UN projections, will also continue to grow through the 2020s and beyond, both because of its higher fertility rate and because of substantial net immigration.
I've argued before that the touted globalization experienced from 1990-present was flawed. It reminds me of the European Monetary Union, whose fatal flaw was in its half-measure of monetary consolidation without fiscal coordination. Without coordinating sovereigns under a free-trade pact, globalization will start by flattening the globe, but it'll also slowly foster imbalances. China's artificial Yuan peg and its stringent controls on the flow of goods/services exploits the loopholes of globalization.
Inputs like labor should move efficiently across boarders to chase hiring demand and higher wages when structural imbalances arise. An oversupply of labor in one region should spill into another region where a deficiency exists. Calculated Risk has noted the tendency toward labor immobility during this crisis. There's an incalculable human quality that messes with the model--people get tethered to a sense of home, for example, derailing the free flow of labor. Plus, immigration controls by conservative regimes block equilibrium pursuits like that of wages.
I'll recycle one of my favorite quotes from John Maynard Keynes:
I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel--these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national. Yet, at the same time, those who seek to disembarrass a country of its entanglements should be very slow and wary. It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction.
Over at Seeking Alpha, I opined: By their very nature, certain goods/services belong in the tradewinds. Others should be found locally whenever reasonably attainable, even if available for cheaper somewhere else. Buy local foodstuffs. If you don't live atop a sea of oil, invest in the derivation of your own energy solutions. I like Damien Hoffman's notion over at Wall St. Cheat Sheet, "I’m not advocating harsh protectionism or tariffs. I’m simply proposing we get back to a point of sane moderation where we eliminate the trade deficit and learn how to build strong local economies. Many parts of the US are supporting local farmers and food. Let’s take it one step further and support local everything." It blunts the economic impact that motivates international political extortion.
In the end egocentrism is inextinguishable, dooming globalization to fail at the hands of national & individual interests if not pursued in earnest, without barriers. Keynes' aforementioned model is more practical: when a product can be found locally, shouldn't we attain it locally? Messrs. Howe & Jackson think that will happen naturally:
We may also see increasing pressure on governments to block foreign competition. Historically, eras of stagnant population and market growth— think of the 1930s—have been characterized by rising tariff barriers, autarky, corporatism, and other anticompetitive policies that tend to shut the door on free trade and free markets.
--Romeo (hat-tip John Mauldin)
Original article at The Buttonwood Tree
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.