The Law Of Demographics…..John Mauldin’s “Outside The Box”

Posted By on August 2, 2010

 

Key Elements Of This Article Are:  In the United States, the Fed’s latest Survey of Consumer Finances revealed that current or close retirees have roughly $50,000 of retirement savings, excluding the now questionable equity in their homes. Those born before in a macabre sense, the financial crisis couldn’t have been better timed, if it focuses attention on the need for people to save more for retirement.

And part of the reason they are in such a fiscal black hole resides in the explosion in their structural, age-related liabilities. According to the IMF, the net present value of pensions, healthcare and long-term care out to 2050 dwarfs the costs of the banking crisis everywhere. Based on policy commitments in mid-2009, it is over 600% of GDP in Spain and Greece, 500% GDP in the U.S., 335% in the UK, and between 200 and 300% in other major EU countries.

Demographic change will bring forth new consumer products and patterns, significant changes in information, bio and resource and materials technologies that could revolutionise manufacturing processes, mind-boggling changes in medical science and treatment, new forms of asset gathering and insurance and, lest we forget, the next billion consumers in emerging markets and all that jazz.

Demographics, Destiny and Asset Markets

The evolving financial crisis in the West and its long-term consequences has exposed deep-seated structural flaws in our economies, and in the global economic system. These span our susceptibility to deflation, the loss of traditional economic growth drivers, the integrity of public finance, the regulation of the banking system, weaknesses in labour markets, and the lack of discipline that obliges creditor countries, such as China, Japan and Germany to share the with a less visible and slow moving phenomenon that has a direct bearing on many of the structural problems we face, namely the onset of rapid aging.

Although demographic projections of population, life expectancy, and fertility are not free from error, the nature of aging means that for all intents and purposes, demographics are our destiny. A lively debate about rapid aging in richer economies has been going on for at least the last 30 years, and in its simplest form, it is about the essential question of “who’s going to look after grandma?”

Although the populations of the U.S., and other Anglo- and northern-European countries are expected to rise slowly over time, those of Japan and Russia are already declining, and those of Germany, Italy and Spain will join them in the next five years.

But population aging also has other weightier economic, social and political consequences that are emerging from the dark shadows cast by the financial crisis. Some are about the efficiency of our economic coping mechanisms as the labour force ages, and stagnates or declines. Others are about the pressure to rebuild public and private savings, and strengthen our ability to finance aging societies without punitive levels of taxation on our children or ourselves.

The core of the debate is about the so-called demographic dividend, which occurs when falling fertility lowers child dependency, and when the working age population (aged 15-64) expands, but before old age dependency starts to rise significantly. This dividend is associated with rising investment and accelerating economic growth, and describes the situation that western economies have enjoyed for the last 30 years or so. But they have now exhausted this benefit, because weak fertility is keeping the supply of new workers in check, while the long-living boomers are going to be increasingly visible, bringing to their children hefty bills for income support and care costs. Consumption patterns will change, brands and spontaneous purchases will give way to more regular and common-or-garden consumption, and aggregate savings will decline over time. While the boomers may delay the asset switch equities could fall well short.

In the real estate market, the crisis will be the principal determinant of prices for a while, but it is worth noting that the number of 20-44 year-olds, deemed to be the prime first time home buyer cohort, will fall by 10-20% in the next two to three decades in most advanced nations, but by 30% in Spain and China, and by a whopping 40% in South Korea. So, by the time the leading edge of the boomers is aged 80-90, that is 2025-2035, we might well ask, who will buy the homes they are going to sell to fund residential care or when they downsize?

As far as real estate is concerned, all we know is that the cycles are protracted in both directions. While government and central bank policies have supported housing markets and values, and continue to do so, it would be rash to declare that the downswing in prices is over. There are too many bad mortgage loans that haven’t been written off or restructured, too many banks whose main aim is to shrink assets, too many properties for sale (or hidden in bank ownership), and it’s far too early for households to come back from their balance sheet repairs. The UK’s chronic under building of housing may offer some protection, but not in the event that the economy should slip back in to recession—a possibility that becomes increasingly likely in a lot of places in the face of concerted fiscal retrenchment in 2011-2012. In the longer-term, the weaker age structure, especially of younger, first time home buying citizens, will most likely dampen the housing cycle, certainly in real terms.

Individuals generally don’t save enough for their retirement. In a recent UK survey, a quarter of those who could save didn’t, and half of men and more than half of women who did, didn’t save enough. It’s not dissimilar in most other countries, and in the United States, the Fed’s latest Survey of Consumer Finances revealed that current or close retirees have roughly $50,000 of retirement savings, excluding the now questionable equity in their homes. Those born before In a macabre sense, the financial crisis couldn’t have been better timed, if it focuses attention on the need for people to save more for retirement.

And part of the reason they are in such a fiscal black hole resides in the explosion in their structural, age-related liabilities. According to the IMF, the net present value of pensions, healthcare and long-term care out to 2050 dwarfs the costs of the banking crisis everywhere. Based on policy commitments in mid-2009, it is over 600% of GDP in Spain and Greece, 500% GDP in the U.S., 335% in the UK, and between 200 and 300% in other major EU countries. The precise numbers are less important than the orders of magnitude, and the implications for public policy.  For example, budgetary pressures have forced governments to implement or consider a variety of demographically driven policies. These include an increase in the retirement age, a temporary freeze on pensions, higher public employee contributions to pension schemes, and schemes to get citizens to pay more towards healthcare, or to specific conditions.

The answers to many economic and financial issues we consider nowadays aren’t rocket-science, but the political will and imagination to do something about them are in short supply. To countenance the effects of demographic change, there are many things that governments can do. They can increase employee participation in the work force, for example, raising the pensionable or retirement age, changing pension systems, retirement patterns, and working practices, encouraging companies to retain and retrain older workers, and in some nations, making it possible for more women to enter the labour force. They can help to create a climate for stronger productivity growth, by trying to avoid the financial strangulation of schools and higher education during the coming fiscal cutbacks, and by using public policy levers to encourage entrepreneurs and innovation, and by targeting the new sectors that will drive future growth. This last idea, by the way, is a long-established form of public support for industry, not least in the United States.

These initiatives all sound rather fanciful in 2010, but in the end, but they will provide the means for us to adapt to aging societies. In the meantime, even though it’s hard to find positives for real estate as an asset class, some types of equities will remain the investor’s asset of choice, cyclical volatility notwithstanding. Demographic change will bring forth new consumer products and patterns, significant changes in information, bio and resource and materials technologies that could revolutionise manufacturing processes, mind-boggling changes in medical science and treatment, new forms of asset gathering and insurance and, lest we forget, the next billion consumers in emerging markets and all that jazz.

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