The Generation Impact

"The aging process has you firmly in its grip if you never get the urge to throw a snowball." - Doug Larson

"You are as young as your faith, as old as your doubt; as young as your self -confidence, as old as your fear; as young as your hope, as old as your despair." - Douglas MacArthur

"Growing old is mandatory, growing up is optional." - Chili Davis

"Wrinkles should merely indicate where smiles have been." - Mark Twain

OK so this Thanksgiving happens to be just past my 50th birthday so that may be why the topic of aging is at the forefront of my mind this week but then again, as I enter the downhill slide, I join a growing army of veterans and so add to the burgeoning population of older citizens.  Now those of you that know me know that I am firmly a part of the third quote above and my son is doing an excellent job of keeping me young at heart but the sad fact is the developed world is aging at a pace not before seen and this is having dire consequences on economic growth.

Japan, Europe and America are all barely growing in terms of population in fact a number of countries have population growth rates below two, the number required to replace the outgoing population.  The impact on expected economic growth that this is having is huge as the older generation is not in the habit of large consumption and is in the habit of protecting what they have for retirement.  So let's look at each one of these metrics in a little more detail.

Large consumption is typically taken on when a young or middle age couple expand their family, buy houses and cars and invest in businesses.  During these years the consumption of everything from automobiles to houses has a massively positive impact on economic growth as demand for goods and services is high.  In economies where the bulk of the population is young to middle aged (as was the case in the United States during the baby boom era) annual GDP growth is strong.  Companies benefit from a strong consumer and as this makes up over 70% of GDP recessions are short and growth cycles are extensive.  As we approach 2014 more and more of these baby boomers are aging thereby slowing the consumption of goods and services while increasing savings in preparation for retirement.

This drag on GDP growth has significant impacts for investments in both bonds and stocks.  In a recent study it was found that as populations age the returns to the stock market and the bond market are negatively impacted.  This is relatively intuitive as without solid GDP growth and outlook it is hard for stocks and bonds to produce abnormal returns.  So it is interesting that the stock market has run so far in the United States when there is the potential long run economic drag of an older population. 

On the bond side, as I have argued in my book How to Thrive in the Obama Economy due to this demographic shift there is a high probability that interest rates remain subdued for years to come.  Consider that if there were a spike in the 10-year Treasury to say 5%, the demand that would result to lock in that yield after years of sub 3% returns could drive the bond price back up holding interest rates low.  It appears to me that the consensus that bond rates will automatically rise does not take into account this growing demographic and their shift in desire from speculation and risk to protection and yield.

With the head winds of the aging population in most advanced countries the obvious solution is to look beyond these for stock investment to the BRIC countries of Brazil, Russia, India and China.  Obviously these investments come with a large dose of volatility and risk but certainly the demographic trends are in your favor and if history is once again on your side you would do well to take advantage of the opportunity presented in these markets.