The Weekender

JUNE 10, 2023

Getting old before rich

One of the things that struck me about Saudi Arabia on a recent trip, other than how welcoming and friendly everyone was, was how young they were. The average age is 29. This adds to the positivism and vibrancy of the place and stands in contrast to many other parts of the world. The average age in the US is 38, the UK is 40, in Germany 45, and in Japan it is nearly 50. This got me thinking of demographics – a topic of growing importance to government, pension funds, health systems. And markets.

Demography is destiny

Auguste Comte coined the phrase “demography is destiny” and argued the size and structure of a population will tell you a lot about its future. Peter Drucker believes all business shifts can be reversed engineered to demographics. Neil Howe’s book, The Fourth Turning draws on this and is helpful to understand where we are heading, but also, where we are today. Another book worth reading is from the Dean of my alma mater, Mauro Guillen, ‘2030: How today’s biggest trends will collide and reshape the future of everything”. He argues we’ll soon have more grandparents than grandchildren, that Asia will dominate consumption trends, growth in female millionaires will outstrip those of male, and that cities will become the epi-centre for climate transition (accounting for 80% of energy consumption). Also, that within a generation, the largest age cohort will be above 60 and will own 80% of the wealth in the US, giving rise to the “gray market” the largest consumer block of all.

The Gray Market

In China, roughly 54,000 people celebrate their 60^th birthday each day. In the US it’s 12,000, and around the world it’s an astounding 210,000. And by 2030, this group will represent more than a quarter of the population in some of the biggest economies in the world, including 38% in Japan and nearly 50% in Korea. Yes, a challenge for pension and health care systems (use of AI here seems perfectly timed) but also an enormous opportunity for business to tap into what Guillen estimates to be a $20trn economy. We will need products geared to their needs and nuances – noting today’s age of 50 is not akin to that of our parents (I say, hopefully). Yet, according to Guillen, 96% of consumers over the age of 50 feel ignored by advertisers. So, while Digital, Social, and AI are all the rage, ask your strategist, manager or GP what their Gray Market plan is and how they’re going to monetise one of the biggest mega trends in markets. Boomers have the bucks (I’m at the right bank!), but advertisers don’t seem to care. That, I believe, may be about to change.

But it’s years away, why should investors care?

Well, it’s not just a problem for policy. It matters. For markets. Consider that S&P now predicts that if things remain as they are, half the world’s countries debt will be junk status by 2060. That and they will run deficits amounting to 9.1% of GDP by 2060, up from 2.4% in 2025. The FT report that aging populations are ‘already hitting’ governments’ credit ratings. In a separate study, KERI predicts Korea's GDP could plunge 28.38% by 2050, the national debt will snowball, and the state pension fund will be depleted by 2055¹. And with declining fertility rates, what of household formation, what of housing demand? What of my investments in copper stocks (thank God for climate change!).  

Demographics and the PE cycle

In a study by the Federal Reserve Bank of San Francisco², it found that between the 1950s and early 2010s, average PE rations for listed companies fell as the population aged and rose as it tuned younger. So, when thinking about asset allocations, aging populations combined with high multiples is potentially bad news for long-term returns. Another trigger, perhaps, to consider markets with low starting valuations, like the UK, Japan and EM. In Brazil, the median age is just over 30x with a CAPE ratio below 10x. It’s about 28x in the US. That said, I would be more discerning when it comes to the US as a significant number of tech companies and suppliers thereto, will have a large role to play in the solution here, as AI and robotics could dramatically improve productivity. So yes, active management has a future, even if in a range-bound market, which I believe the US is currently in. As the ‘70’s shows, markets might go nowhere (bad news indexation) but some stocks can flourish. You just have to find those stocks.  

Creative solutions

Ignore the catastrophising. There are things we can do. AI has a huge role to play with respect to a productivity boom, and we will discuss this more over the next few weeks (clue: I can get MBA-level assistance for $20/month). Technology helps through things like AirBnB (which provides new revenue for the largest pension asset, the home). Co-bots should improve aged-worker productivity, and there is now a push towards prolonged retirement, which seems to be working. In fact, over 55’s are the fastest growing worker segment in the US and the +75 cohort is expected to grow 96.5% over the next decade! I applaud this, so too might owners of, and lenders to, Construction & Real Estate companies who may be hoping to see more folks back in the office.  This cohort is biased towards ‘presentism’. It also might inject some old-fashioned work ethic that improves productivity. And mating behaviour (see above: chance encounters).

Governments will focus on further subsidies for fertility treatment and child-care, ‘worker-age’ immigration (education needed here as to need/benefits), tax code changes (hard sell), incentives for prolonging retirement and pension reforms (reviving the cult of equity). The latter may be even more acute in the face of inflation, which risks not simply a pension crisis (think deficits) but a crisis for pensioners who themselves may be unable to afford retirement as their nominal returns fail to reflect the real costs of living (why are we not talking more about this?). Perhaps my favourite solution: Singapore once wrote to childless married couples of the importance of having a family and offered free trips to Bali to get them in the mood. Things are never as bad as they seem! 

Why so much pessimism?

There seems so much pessimism around. If AI doesn’t kill us, then a super-bug, nuclear war, wild fire or flood, will. But why all the catastrophising? Why glass so empty? Perhaps this too can be explained through demography. I listened to Seth Godin on the Tim Ferris podcast recently and he offered this solution: “Boomers have driven our culture since the day I was born. That when we were draft age, that was when the draft really mattered. And when we listened to rock and roll, that’s when music really mattered. And when people needed to make money for their family, that’s when Wall Street really mattered. And now boomers are dying. And so, we’re living in a culture where there’s an overhang of all these people with loud voices talking about the end of the world. Because it’s the end of their world. But it’s not the end of the world”.  Perhaps that explains it?

Not everyone is bearish

More corporate insiders bought shares in the last 30 days than at any time since March 2020 according to Bloomberg. Specifically, insiders at banks—especially smaller banks—are buying shares in their own companies at an increasing pace. Separately, I mentioned last week I didn’t think breadth, or rather, the lack of it should be a heavily-weighted decision variable. While the S&P is up 11.5% YTD (at time of writing) it’s driven principally by 7 or so stocks. Many argue the rally is too narrow, and so, not sustainable. But what if large cap growth momentum is soon joined by other cyclical areas? Such is not uncommon when looking at history. Take, for example, the fact that Semis, Homebuilding and Construction sectors are all up more than 25% YTD. These moves could be telling of a future where AI unleashes a productivity miracle and the arms race to tool for such – onshore – could inspire a capex boom in manufacturing. However, to get comfort – and before we can confirm these bullish trends – I would think you need to see both banks and small caps rally. Banks are up c.15% from their lows, but still well down YTD. The small caps are doing better, however. The RTY is up 6% YTD. It will pay to watch these sectors for clues for market direction.

My play on polygamy

According to Guillen in 2030, the gender imbalance is so extreme in Siberia, there is a scarcity of marriageable men. So bad in fact, a group of women have lobbied the government to legalize polygamy. Siberian women have become persuaded that ‘half’ a good man is better than “no man” as it would give them rights conferred on ‘married couples’ not to mention legitimacy for their children. In China, it’s the opposite. They have a surplus of marriageable men (thanks partly to the one-child policy). So, if things go bad for me at Northern Trust, I’m thinking of setting up a dating app for these markets, called “EastmeetWest”. 

Please reach out with any queries or questions – if you would like to receive future editions of The Weekender, feel free to email me at gdp2@ntrs.com.