{"id":40431,"date":"2013-07-30T11:39:55","date_gmt":"2013-07-30T15:39:55","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=40431"},"modified":"2013-07-30T11:39:55","modified_gmt":"2013-07-30T15:39:55","slug":"europes-baby-bust-and-the-consumer-depression","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/07\/30\/europes-baby-bust-and-the-consumer-depression\/","title":{"rendered":"Europe\u2019s Baby Bust and the Consumer Depression"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

Is this past weekend\u2019s Financial Times<\/em>, Gillian Tett commented\u00a0that falling fertility rates in Europe threaten government tax revenues<\/a>.<\/p>\n

Well, yes, they do.\u00a0 But not necessarily for the reasons Ms. Tett expects.<\/p>\n

European fertility rates have been below the replacement rate of 2.1 children born per woman for decades.\u00a0 The UK and France have hovered near the replacement rate for most of this period, but birth rates in Germany, Spain and Italy have been limping along at crisis levels since the 1980s.<\/p>\n

Think of it this way: Here in the United States we hear about the next great generation\u2014the Millennials (also called Gen Y and the Echo Boomers)\u2014and how they will shape the country in the decades ahead.\u00a0 Numerically and culturally, they are the most important generation since the post-war Baby Boomers.<\/p>\n

Well\u2026let\u2019s just say that no such sentiment exists in Germany, Italy or Spain.\u00a0 None of these countries had a secondary baby boom in the 1980s and 1990s.\u00a0 The young personalities dominating the discussion here were simply never born in Europe.<\/p>\n

\"Slide1\"<\/a><\/p>\n

Of course, young workers that were never born will not be able to pay taxes or man the factories of tomorrow.\u00a0 This is the point that Gillian Tett makes, and it is a valid one.<\/p>\n

But it also happens to miss the very large elephant in the room: Workers can be replaced by automation and outsourcing; consumers cannot. \u00a0To carry this a step further, General Motors or Ford can program a robot to build a car.\u00a0 But that robot has no interest in buying<\/i> a car. \u00a0And as roughly 70% of the modern economy is consumer spending, that\u2019s a big problem.\u00a0 Without a steadily growing population, the modern consumer economy breaks down.<\/p>\n

I\u2019m not picking on Ms. Tett; she has a much better grasp of the importance of demographics than most journalists, and she has clearly done her homework.\u00a0 But virtually everyone in the economics and investment professions that follows demographics (yes, there are a surprising number of us) focus their energies in the wrong places. They focus almost solely on supply.\u00a0 Demand\u2014when it is considered at all\u2014is viewed as a byproduct; something that just happens on its own (For the geeks in the room, this concept has a name: Say\u2019s Law<\/a>).<\/p>\n

This is not an academic argument about how many angels can balance on the head of a pin.\u00a0 It matters because the focus on production and boosting GDP growth is actually counterproductive in a world of aging and shrinking populations.\u00a0 Boosting supply during a period of slack demand simply causes deflation\u2026which in turn discourages future investment and creates a debtor\u2019s nightmare.\u00a0 Just ask Japan.<\/p>\n

Japan\u2019s is further along the path of demographic decline than Europe.\u00a0 It has the oldest population in the world, and adult diapers are now a more promising growth business than infant diapers<\/a>.\u00a0\u00a0\u00a0 Japan also happens to have the largest debts in the world, fast approaching 240% of GDP.<\/p>\n

Japan\u2019s leaders have effectively spent their country into insolvency with Keynesian deficit spending and have nothing to show for it.\u00a0 Sure, Japan has great roads and infrastructure.\u00a0 But it\u2019s all for naught if there are no Japanese citizens left to use them.<\/p>\n

Given all of this, you might be surprised to hear that I am actually bullish on Europe, at least in the short term.\u00a0 European companies are, on average, quite a bit cheaper than their American or Japanese counterparts, and I expect investors to warm up to Europe as the threat of meltdown continues to recede.\u00a0 Furthermore, Europe is finally starting to see those first green shoots of growth; in the past week, the Spanish unemployment rate fell for the first time in two years, and European oil demand is on the rise\u2014again, for the first time in two years.\u00a0 As better economic news continues to drip in, I expect investors to reevaluate Old World stocks.<\/p>\n

But at the same time, I recommend you choose your European investment carefully<\/a>.\u00a0\u00a0\u00a0 Focus on companies that are domiciled in Europe but that get the bulk of their revenues overseas.\u00a0 In my last article<\/a>, I mentioned Dutch brewer Heineken (<\/span>HEINY<\/a>)<\/span> <\/b>for its outsized exposure to developing Africa. \u00a0\u00a0Unilever (<\/span>UL<\/a>)<\/span> <\/b>and Nestle (<\/span>NSRGY<\/a>)<\/span><\/b> are also fine additions.\u00a0 Both have relatively modest exposure to the European markets and both are well positioned to benefit from rising living standards in emerging markets.<\/p>\n

Unilever and Nestle also happen to be holdings in my \u201cDrip and Forget\u201d dividend investing strategy, and Heineken is a current recommendation of the Sizemore Investment Letter<\/a>.<\/p>\n

SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today. \u00a0This article first appeared on InvestorPlace<\/a>.<\/p>\n

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