We are entering a one time event in human history - population will peak and then drop in our lifetimes. The demographics are clear - in developed nations, birthrates are below replacement, and in developing nations, they are plummeting towards below replacement. The primary cause seems to be the education of woman, who then see much more to life then being barefoot & pregnant. (Just in case anyone has any doubts, I find the liberation of women to be the a GOOD thing, the seminal achievement of this era.)
One consequence is a radical change in investment. We all tend to believe in regression-to-the-mean, so if rates are low, they will rise; or if bonds are high, they will fall. The demographic trend may lead to a one-time direction that should last 40 - 50 years, and the fact it doesn't change will catch everyone by surprise.
Another consequence is grave risk of the Japanization of developed countries - decades of slow growth or modest decline. One massive driver of growth are the Tweeners - twenty-somethings who enter the workforce and buy their first car, house, appliances, etc. Subsequent purchases tend to be trading up or trading in. Without the Tweeners, economies grow much slower. (Hence the wisdom of consumer credit - fuels the Tweeners, is paid back when they begin saving in their 40s and 50s.) The Birth Dearth means the Tweener growth engine sputters.
(As a policy implication, it may be time for the US to open the immigration spigot, particularly for the best & brightest Tweeners from around the world.)
Economists at CSFB have assessed the inevitable demographic trends and made five predictions.
First prediction: no inflation. The new people entering the workforce - the Tweeners from 20-29 - drive economic growth & demand for goods. They buy their first car, first house, etc. After that, people move up, shift cars - but the impact of trading up is much less, on the margin, then first-time buying. Over time, the affluent buy experiences more than goods. One can correlate the bulge in Tweeners to inflation (Boomers got into their 20s in the '70s), and the aging of them to disinflation. Point: with the drop in new babies, the next 40 years will NOT have the big bulge in the 20-year-olds to drive growth in goods. At best, with immigration, we will have a flat demographic (all 'decades' about the same size); but many countries - Japan in particular - will have an inverted pyramid.
Second prediction: forget social security. It was always a Ponzi scheme, based on a demographic pyramid. It will NOT deliver to Boomers what their parents got. GenXers already know this and are saving at higher rates than Boomers. Boomers will begin to panic, especially when this bad news is combined with the next prediction.
Third prediction: low interest. They aging do not need to borrow to buy their firsts, so demand for debt will be slack. Interest will remain low or go even lower. We will NOT get our retirement income from fixed income!
Fourth prediction: global scramble for that elusive yield. When aging Boomers realize their nest egg is insufficient due to low interest rates ($4mm was not enough! at 5% it delivers $200k per year, but at 1%, it delivers poverty), they (and especially their pension funds) will see their panic turn to hysteria as they look to find higher yields in higher risk instruments.
Fifth prediction: the middle gets squeezed. Sears and similar served the Tweeners. Instead, we will be served by high-end brands (experience bought by wealthy Boomers) and value-brands (Walmart et al.). This will be across all industries. Either you are big and efficient, or small and nimble to serve niche needs.
Where to invest?
1) Stocks - panicking Boomers flood 401k plans which buy equities. Dow 36000 is back!
2) Dividends - they'll be back! Luxury or value stocks only. Does Walmart pay a dividend?
3) Coastal temperate retirement property - should explode 5-10x in value as Boomers rush to retire. (Have you heard of the Kiwi concern over Hollywood types buying up beachfront property north of Auckland?)
Kudos and plaudits! These little paragraphs summarize a very large and, in my book, prescient view of the near future; however, you've neglected to mention the impact of off-shoring where a programmer/engineer/accountant/designer.. can work virtually over the internet as effectively as if he were working from the office next door. And he can do so at a tiny fraction of the salary. I feel that this labour arbitrage will conspire to seal our fate as wages equilibrate around the world. I believe that the unique prosperity that we have enjoyed in North America has been a direct result of our privileged hold on knowledge. This advantage is being rapidly being eroded at internet speed.
Posted by: Gary Tripp | Tuesday, September 21, 2004 at 09:43 AM