Insync Investor Series - Babies and Grandparents

August 31, 2017

Getting Insync with the Global Downshift

The major issues driving the next big stage of global development and what it means for investors.

 

Babies & Grandparents

 

Where it starts and ends. The world was quietly changing in big ways whilst we focused on other things. The ‘We” being media, governments, central banks, economists, fund managers and academics.  True the ‘other things’ deserved our full attention, like the GFC, but they are like the noisy child demanding our attention at the expense of other equally as important things. 

 

1.4 Billion less babies. Since the early 1990s there has been far less of them.  Twenty years on (around 2008) that generation finally went to work but with -.14Bn, growing our world and paying taxes. Why? Because they were never born. This extremely crucial engine of growth has just taken a major hit for the worse.

 

The media doesn’t cover events that take time to reveal themselves in slow quiet ways. Back in the 70’s & 80’s global institutions and western governments got together for the ambitious target of halving severe poverty inside 30 years. Everyone laughed, but here’s the thing…they did it in half the time. When poverty reduces women have fewer children. It doesn’t matter white or black, Christian or Muslim, western or eastern, family sizes shrink and for sound reasons.

 

Sure the world’s population is still growing- around 2% each year in fact, so how can that be?

 

Grandparents- way more of them. Yes, those pesky people living life to the full and for much longer! Better health care, nutrition and living conditions is why.  In 1960 global life expectancy was in the low 50’s. By 2010 it rose to over 65. Indeed emerging nations such as Vietnam and China now exceed those in the USA.

 

Things are changing…..

 

The fastest growing age group is the 80+ followed by the 60+. So whilst there are less arriving onto our crowded little patch of blue & green, the ones already on it are sticking around much longer. This is why the overall population keeps growing.

 

7.5 Billion and growing….. Eventually the irrefutable arithmetic from events started back in the early 90’s mean the population will eventually decline too. In 2050 it will reach 9 billion, then edging up to around 9.5 billion before declining irreversibly. Government policies cannot alter this powerful unstoppable trend.

 

Like a vice squeezing the workforces of the world, these twin events mean far, far, less workers. For economies to grow systemically, they require ‘workforce growth’ over 2% p.a. as one of two key ingredients. Since WWII it’s averaged 3% p.a. In all OECD nations; except those with high immigration, there is no growth. Indeed in the USA it’s negative! Germany and Japan are trending towards negative levels of -10%. This is the first time since WWII.

 

Germany has to bring in 1.5 Million migrants every year until 2030 just to keep the workforce at the level it is today! Didn’t see the media cover that one? No nor did we, just the uproar of a one-off 1 million immigrant intake two years ago. In Japan the workforce and its total population are in serious decline. Entire towns are being boarded up. They are our canaries in the coal mine. Only the last ‘extreme poor’ bastion on earth- Africa is different.

 

Australia, Singapore, Canada and New Zealand are the only temporary and small OECD exceptions, and it’s entirely due to immigration. Still this only gets us to just halfway at 1% p.a. workforce growth.  It’s also a big reason why we are still doing well economically.

 

Long Term GDP (economic) growth is driven by Workforce growth + Productivity growth (our next article in this series). They have to average around 3% each to generate 3% GDP growth, the average since WWII.

 

These numbers are buried at the base of almost all assumptions, models, theories and trends. The fact is both inputs have reduced by at least 1/3rd but no one is accounting for this game changing impact.

 

Who knew that babies and retirees could wreak so much havoc!

 

There are exceptions but these last less than a decade and are driven by ‘one-off’ events- not lasting benefits.  World banks, economic organisations and governments have laid the blame solely at the feet of the GFC. It was around the same time this lasting mega trend began. The GFC flash and noise cloaked the silent mover!

 

The new world of enduring low growth world is caused by less babies + more old people. Policy can’t change it but as Darwin once observed, one can adapt!

 

China won’t save us: Worryingly, if you strip out China world growth falls by another third to well below 2%. In other words it is only China’s one off impact of ‘catch-up’ that’s making the bigger picture better than it actually is. China too has a large number of game-changing complex challenges ahead in order to sustain its 6% rate propping up the world. It also is suffering a large workforce decline, and one of the fastest ageing populations along with flat productivity. The message is don’t rely on China sustaining the game!

 

So what is making GDP sluggish?  

 

Workforce growth and growth in productivity. How can nations grow their workforces when workforces are shrinking as more are retiring than ever before, and far less are being born to replace those retiring and dying? Simply put, we cannot.                                                            

 

One or two countries can for a while via open immigration, but eventually it’s a zero-sum game.

 

To obtain consistent growth above 3% you require growth of 3+% in productivity and the same in the workforce. In all OECD nations that matter productivity is very low and falling.

 

China, India, Brazil and Indonesia are in this list- so big emerging countries can’t rescue us long-term either. The USA in particular is suffering these declines in the last decade as well. Workforce growth was the biggest silent supporter of its prosperity since WWII (not technology as most think).

 

Real-estate. Perhaps that’s the solution? Apart from it being unwise to risk the majority of your assets into just one or two investments (and illiquid ones at that), longer term this will not help much. This is because negative or flat productivity and workforces lead to stagnating economies which in turn act as breaks on property demand – prices and rental income. Japan’s real-estate is in a 25 year decline caused by declining workforce growth. Not enough babies and lots of older people with xenophobic immigration is a potent mix for real estate lovers as well.

 

Government policies have all failed, with Trump-ism and nationalism already proven as impotent, and downright dangerous. History is important to remember and consider.  Investors need to adapt and revaluate the base assumptions underpinning their investments and strategies. The usual institutions, government and finance sectors will be the last to wake up and see the world for what it is, not what it was.

 

There are many claims made in this article that demand further scrutiny, explanation and understanding. This can be found within Insync’s White Paper ‘The Unstoppable Global Down Shift’.

 

 

 

 

 

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