{"id":28824,"date":"2012-04-04T23:57:52","date_gmt":"2012-04-05T03:57:52","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/04\/do-demographics-really-condemn-us-to-a-bleak-future\/"},"modified":"2012-04-04T23:57:52","modified_gmt":"2012-04-05T03:57:52","slug":"do-demographics-really-condemn-us-to-a-bleak-future","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/04\/04\/do-demographics-really-condemn-us-to-a-bleak-future\/","title":{"rendered":"Do Demographics Really Condemn Us to a Bleak Future?"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

Do demographics<\/strong> drive markets? George Magnus of UBS, isn\u2019t convinced.<\/p>\n

<\/span><\/p>\n

He accepts that the \u201chalcyon era of sustained equity and real estate price appreciation from the 1980s until the financial crisis\u201d happened just as the baby boomers of the 1960s entered the work force. Clearly this brought women, and well educated women at that, into the workforce and meant the quantity and the quality of labour rose at the same time.<\/p>\n

So consumption rose and savings rose too. Those savings went into equities in one way or another (via pensions and so on). They also went into property (particularly in the US and the UK).<\/p>\n

He isn’t so sure of the rest. According to the next part of the story, this \u201cdemographic dividend\u201d was the main reason \u2013 perhaps the only reason \u2013 why the prices of all these assets rose.<\/p>\n

The problem now is that this process has run its course. For the last 30 years or so, falling fertility has reduced child dependency, yet, with the size of the working population rising, we haven\u2019t had to worry too much about the ratio of dependent old people either.<\/p>\n

The Demographics Situation Today<\/span><\/h3>\n

Low fertility rates mean there isn\u2019t a ready supply of new workers, and the baby boomers themselves are on the verge of being old \u2013 demanding care costs and endless time from their children.<\/p>\n

As far as the demographic doomers are concerned, this means that we can just turn our charts upside down. Savings will fall at the same time as the number of people of first-time-buyer age falls: \u201cthe 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.\u201d<\/p>\n

The result? Equity prices will fall. And so will property prices<\/a>. Fast.<\/p>\n

It sounds like a good story, I say to Magnus. What\u2019s wrong with it? The main thing, he says, is that \u201cthe whole aging thing is unique in human history\u201d so we just don\u2019t know how it will pan out.<\/p>\n

It might make sense to say that returns on equity will be lower than they have been. But to suggest that \u201cthe entire asset appreciation of the last 30 years\u201d is down to demographics? Here he explains why that is \u201cpatently absurd\u201d, given that it totally ignores the \u201ceffects of financial deregulation and innovation and a virulent expansion of credit.\u201d<\/p>\n

And what of \u201cmacroeconomic management, profits, innovation, governance and financial stability\u201d?<\/p>\n

It is also the case that \u201ccapitalism rewards scarcity,\u201d so we can expect, in the West at least, to see labour beginning to claw back some of the rewards that have accrued to management and equity over the last decade. Some may think that a bad thing. I am pretty certain it is not.<\/p>\n

Either way, the point is that it isn\u2019t a given that aging populations make for falling asset markets. And even it turns out that they do, the effect won\u2019t be seen for a while. \u201cDemographics are slow moving and relatively predictable, and asset markets are sensitive to an array of economic and financial developments, most notably the credit cycle.\u201d<\/p>\n

Can You Trust the Demographic Figures?<\/span><\/h3>\n

It is also worth noting that forecasting markets based on demographics is only as good as the forecasting of the demographics. Which isn\u2019t generally very good.<\/p>\n

Every year, Japan\u2019s National Institute of Population and Social Security Research (NIPSSR) puts out a forecast for Japan\u2019s future population. They usually get it wrong. In 2006, their medium forecast for the Japanese population was 127.18 million. Their most optimistic forecast (of nine) was 127.64 million. The actual number in 2010 was 128.06 million.<\/p>\n

The difference, says Jonathan Allum of Mizuho in the Blah, comes down to fertility. 2005, when fertility in Japan was 1.26, did not mark, as everyone thought it did, just another point on a downward path. It was the bottom. The number is now 1.39.<\/p>\n

The world\u2019s many Malthusians have, as Allum says, long \u201cbeen confounded\u201d by the fact that fertility falls as wealth increases. However this inverse correlation does not last forever.<\/p>\n

Here is Matt Ridley on the subject in his 2010 book The Rational Optimist<\/em>: \u201cThe latest research uncovers a second demographic transition in which the very richest countries see a slight increase in their birth rate once they pass a certain level of prosperity. The United States, for example, saw its birth rate bottom out at 1.74 children per woman in about 1976; since then it has risen to 2.05. Birth rates have risen in eighteen of the twenty-four countries that have a Human Development Index greater than 0.94.\u201d<\/p>\n

At the time, Ridley referred to Japan and Korea as \u201cpuzzling exceptions\u201d to this rule. They are not. Both have, against all expectations, seen rises in their fertility rates in the last few years. Another reason perhaps why things in Japan aren\u2019t quite as bad as the bears think they are.<\/p>\n

Merryn Somerset Webb<\/strong><\/p>\n

Editor in Chief, MoneyWeek (UK)<\/strong><\/p>\n

<\/strong><\/p>\n

Publisher\u2019s Note: <\/em>This is an edited version of an article that first appeared in MoneyWeek (UK)<\/a>.<\/p>\n

<\/span><\/strong><\/p>\n

From the Archives\u2026<\/em><\/strong><\/p>\n

<\/strong><\/p>\n

Why Spain\u2019s Economy is the Next Big Problem for the Eurozone<\/a><\/p>\n

2012-03-30 \u2013 John Stepek<\/p>\n

Water: A Long Term Trend to Follow<\/a><\/p>\n

2012-03-29 \u2013 Patrick Vail<\/p>\n

How to Avoid the Welfare State Hunger Games<\/a><\/p>\n

2012-03-28 \u2013 Kris Sayce<\/p>\n

What Happens When You Put Someone With No Market Experience in the Top Job?<\/a><\/p>\n

2012-03-27 \u2013 Dr. Alex Cowie<\/p>\n

The Star Stocks of the Resource Sector<\/a><\/p>\n

2012-03-26 \u2013 Dr. Alex Cowie<\/p>\n

<\/strong><\/p>\n

For editorial enquiries and feedback, email letters@moneymorning.com.au<\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nDo Demographics Really Condemn Us to a Bleak Future? <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Do demographics drive markets? George Magnus of UBS, isn\u2019t convinced. He accepts that the \u201chalcyon era of sustained equity and real estate price appreciation from the 1980s until the financial crisis\u201d happened just as the baby boomers of the 1960s entered the work force. Clearly this brought women, and well educated women at … <\/p>\n

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