by Steve Holwerda, CFA
Principal and COO
There are many inputs investors look to for analysis and trends of the financial markets. One of the inputs that is often overlooked, but provides interesting and insightful long-term trends, is demographics. Keep in mind that these trends can be defined in decades, not months or years. How old is a country's population? Is their workforce increasing or decreasing? An aging population tends to save while a younger population is creating households and spending.
Think of Japan when considering an aging population. Japan has been an “old” population for years, which has resulted in a slow growth economy and lower interest rates. Contrast this with the United States, which is a consumption economy as the baby boomers move through their life cycles.
Dick Hokenson is an economist for ISI International Strategy & Investment and is a recognized pioneer in the use of demographics to forecast long-term trends for economies around the globe. He currently lives in Holland, but provides his research full-time for clients all over the world. He travels to the U.S. regularly to meet with investment firms, such as ours, to share his thinking, insight and expectations. On May 23, we had an opportunity to have dinner and discuss his demographic outlook.
His overriding thesis is that the global population is slowing and in fact, will stagnate. The result will be lower interest rates for some time, and his recent article in Chartered Financial Analysts Journal titled, “The Race to Zero,” chronicles his arguments. The trend begins in the early 1980s when 30-year Treasury yields were over 14 percent, and we have watched them decline to 3 percent today. The world population in 2010 rests near 6.9 billion, but according to his work, will never reach 8 billion before it begins to shrink. Only the U.S. is among the developed countries with a birthrate in excess of the replacement ratio of 2.0. On top of this, we add 0.3 percent per year from immigration. Our population growth and immigration is one of the reasons that he is bullish on the U.S., despite an expectation for low interest rates.
In contrast, the lowest birthrate in the world is Singapore with a 0.78 rate. Their government is so worried about the ability of their country to grow with this low rate that they actually had a “National Sex Day” last year to send a message to their citizens.
Having followed Dick Hokenson for years, the highlight of any discussion with him is the collection of thought-provoking quips and snippets he shares. This trip, his remarks included the following:
“Countries need to import families not workers. Workers leave when the economy stagnates. Just look at Ireland.”
“This is the American century. I am bullish on America. The U.S. has a 2.1 birthrate that is the highest in the developed countries. Immigration is icing on top of the cake.”
“China has the ‘Japan problem,’ but worse. Japan got rich before it got old. China will get old before it gets rich.”
“I am bearish on China. I see 5 percent growth within five years because of the decline in their working age population.”
“Japan is a dead-cat bounce. The demographics aren't good for Japan.”
“I am more worried about deflation than inflation.”
“Women have been exiting the U.S. labor force since 2000 – not because of the economy but due to a secular change in attitude.” Disclosures