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  #91  
Old 09-19-2019, 05:04 PM
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Mary Pat Campbell
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https://www.ftinstitutional.com/inst...s-shocks-q4-19

Quote:
“WHAT IF …?” SHOCKS FROM DEMOGRAPHICS
The series "Shocks to Macroeconomic Factors" was originally published in partnership with Institutional Investor.com. The additional articles can be found below in Related Content.


Spoiler:
The investment experts at Franklin Templeton spend a lot of time speaking to chief investment officers about “What if . . .” That is, the most beneficial discussions come from exploring the implications of what might happen—not guessing the future—and being prepared for those risks.

In the following conversation, two key players at Franklin Templeton Multi-Asset Solutions—Wylie Tollette, Head of Client Investment Solutions, and Gene Podkaminer, Head of Multi-Asset Research Strategies—talk through the “what if” of demographics including “do the math but guess the consequences” and master “known unknowns.”

Gene Podkaminer: You know what they say: demographics are destiny. And whoever “they” were, they weren’t kidding. When you zoom out to the economy at large, you realize that economic growth has a lot to do with labor force participation rates and productivity, which are directly tied to demographics. Meaning: how many people of working age are in an economy, and are they gainfully employed? What kind of tools do they use to be productive?

Wylie Tollette: Demographic changes are relatively slow-moving. Which is an advantage, but also why it's difficult to call them shocks. You can see them coming. That doesn't mean investing around them is any easier, because they're so long term that the investment implications are difficult to define.

Podkaminer: The consequences are where we find the shocks. If you take a step back and think about the population of a country, it's only dependent on three numbers: birth rate, death rate, and net migration. Do the math. The question of the number of kids we're having is interesting. As lifespans have been increasing in developed markets, the number of children that we have is going down. We're below the required birth replacement rate to maintain population in a lot of developed economies.

Tollette: As I recall, almost all developed economies are below replacement rate. Two and change is the magic number for children per family, right?

Podkaminer: Overall, it’s 2.1, but in Europe right now it might be as low as 1.7. In many cases, these economies can only continue to function by back-filling with immigrants who want a better life, and who want to contribute economically. In other words, if reproductive-aged members of a developed economy are putting off parenthood—or not having children at all—an influx of people from other countries is needed. Economically, that’s how it’s looked at, but it isn’t viewed that way at all politically. If you strip all the politics away, it’s just pluses and minuses. If we can’t replace the people in an economy with folks from other places, we all suffer the consequences.

Tollette: The developed world is barely replacing itself. Not long ago, India was a bright spot on the birth rate front. Now, India has developed and birth rates have fallen. They’re still above replacement, but not as nearly as much as they were even 10 years ago. Development and education do not have to increase a lot for birth rates to decline. That can have a dramatic impact as societies and economies urbanize. A more rural economy needs more kids, more workers, more manual laborers to support the farms. In a more urban economy, it’s a different type of employment and productivity, and a different type of investment opportunity. Africa is one place in the world that continues to more than replace itself by birth rates. It may be the next investment frontier. The economic development that happened in the U.S., Western Europe, and Asia over the past 100 years is happening in Africa now. It's going to be a fascinating decade on that continent.

Podkaminer: Fifty years from now, we won’t necessarily have pockets of high birth rate countries. What does that do to migration? What does that do to the rural versus urban divide? Does that mean we all need to accept much lower growth rates going forward, but potentially with more political stability, or less net migration because people have already settled down?

There are consequences. This can lead to politically charged issues around birth rates and migration, which certainly crossover to policy and ethics.

Tollette: In contrast, Japan is the classic case study around this exact topic. It has not been at replacement birth rates for many years. Its population is steadily shrinking and growing older.

Podkaminer: It’s a very closed economy. There’s no meaningful migration.

Tollette: There’s almost zero net migration into Japan. There’s a variety of reasons—some political, some cultural, some economic. But 30 years ago, Japan was the place to invest. And so, it’s really interesting to watch the political conversation and decisions around migration, because they impact economies—not immediately, but over 30 years or so. It’s something investors need to think about as they deploy assets globally.

Often the consequences of demographics arrive in unforeseen ways. There’s a long lag between policy decisions and actually understanding their ramifications. Take the one-child policy in China, for example. Now, there are incentives for the Chinese to have more children. The government was counting on growing rich and spreading the wealth among fewer people. However, as it turns out, they might be growing old faster than they are growing rich.

Podkaminer: Part of the investment piece there is: if a household only has one child, how do its consumption patterns change? How does your relationship with a lone child evolve versus if you had multiple children? The consequences are vast, from education to the type of housing, the balance in numbers of men and women—and all kinds of interesting things.

Tollette: All of which are unintended consequences of that policy. That’s why the Chinese government is actively trying to drive internal consumption and shifting from an export-driven economy to an internally driven economy. As they do that, they need a population to buy things. They need enough people to buy houses, cars, blenders, and tires, and lawns…

If demographics underlie geopolitics, which underlie investments, then the net effects of that policy were unforeseen—and massive.

Podkaminer: Let’s zoom out to the economy at large. We first went through the Industrial Revolution, that was obviously a sea change in terms of productivity. And then the IT revolution. And now, I don't even know if we have a name for what we're going on now.

Tollette: Maybe a health revolution? Let’s extend this further. We are in the midst of a health revolution, and we’re seeing increased lifespans, which changes the nature of pension planning and the concept of working in retirement. It’s changing the nature of what long-term investing means. Is long-term actually more like 50 years? Do we have to think about 50 years of lifespan of your investments—maybe even longer? I would argue we do.

Longer life translates into needing to save more. “Save more money than you think you need” is a universally helpful perspective.

Podkaminer: Although, it has consequences for the economy as well, because then you're not consuming. For example, say the U.S. is a 70% consumption-based economy, and suddenly you’re saving more money. That changes everything.

Tollette: It absolutely does.

Podkaminer: But it raises some interesting questions. In general, is a 70% base consumption economy a good thing? Or, not? What should we be targeting? Should we be saving more? And again, this has huge consequences. But I don't know from a normative perspective what the right number is. Is it 70%? Is it 65%? Is it 40%?

Tollette: Yes, in fact, there are some folks who believe that the current, dramatically low inflation and interest rates are at least partially driven by the fact that there's a lot of savings going on, particularly in China, India, and other emerging economies. There's so much savings flowing out into the rest of the world, it's driving the real interest rate almost to zero. In other words, capital is virtually becoming free.

Podkaminer: Which is not a good thing. Allocating capital efficiently requires a cost to be associated with it. And so, that's a worry. Consumption has tremendous implications on the environment and on social and political issues. So, I think many folks believe that some economies have gone too far down the consumption route and maybe they should save more. There could be positive consequences from that, as well as negative.

Tollette: There’s another element of demographics that I think is worth keeping an eye on as an investor—young people, older people, and debt. These are very closely tied. One of the consequences of China’s policy, for example, is that the government and companies issue a lot of the long-term debt. Who’s going to pay that debt? Not the older people—they won’t be here to pay. Younger people take on that burden.

This is occurring in corporations, too. New employees enter a much less generous benefit architecture. Young and middle-aged people in the U.S. might be paying into a system for most of their lives and not collect the benefits. That’s occurring globally, and it’s called intergenerational equity. This concept is, “I should be paying for things and receiving things roughly in the same manner my parents and their parents did. However, if I’m paying for what they receive and not getting as good of a deal in return, then I should be upset.”

Podkaminer: You should be upset, and that can create dramatic ripples in the economy. Right now, a lot of young people aren’t that politically engaged. As they age, however, and start families, buy property and pay taxes, they’re going to become increasingly engaged on this topic.

Tollette: In the U.S., Social Security and Medicare are the case studies. Medicare is in worse shape than Social Security. For a generation, we’ve had fully funded Medicare for older people, but it’s running out of money, and the younger people are being asked to pay for it. And they’re saying, “Am I going to get that, too? How does this deal work?”

Podkaminer: If you were a politician that didn’t necessarily have to experience the implications of your actions in the future, but could promise a pretty rich benefit now to help you get re-elected, the principal-agent problem is there in plain sight.

Tollette: Someone has to pay for what you’re promising. Think of the consequences in Greece. As the Greek economy became troubled under massive levels of debt, they became one of the biggest exporters of highly educated people over the last 10 years. And part of the reason that many smart, young, educated Greeks left is that it was very clear they were not going to get the same state-funded, dramatically generous pension that they're parents received. They're thinking, "I'm not going to get this deal, so why should I pay for it?" Podkaminer: A demographic shock with investment implications.

Tollette: The long term really matters. While 90% of the short term is just knowing that you can avoid issues if you can keep your eyes on the five- to 10-year returns, rather than one-year returns. Pension plans and new retirement reality may suggest investing over a 35- to 50-year horizon. Long horizons bring in the big elements—climate, demographics, civility of political systems.

Podkaminer: Even if you don't know the consequences, you should be aware of the issues. I think that's the bottom line. These are big-picture trends that go out 40, 50, 100 years from now. We do not know what the right answer is, we may not know what the right balance is, but we should know about them.

Tollette: Yes, being able to master demographics and the known unknowns.

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  #92  
Old 10-01-2019, 09:33 PM
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Mary Pat Campbell
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FINLAND

https://www.forbes.com/sites/ebauer/.../#342a9dc12240

Quote:
Why Has Finland’s Fertility Rate Collapsed - And Are There Lessons For Us?
Spoiler:
This is, I admit, a headline I simply stumbled upon in looking for something else: “Statistics Finland unveils bleak population forecast – population to start decline in 2031“ from today’s edition of the English-language Helsinki Times.

“Not a single Finnish province will record more births than deaths 15 years from now unless the birth rate rebounds from its current record-low level, indicates a much anticipated population forecast published on Monday by Statistics Finland.”

As a reminder, this is Finland we’re talking about, not a country that ordinarily appears in discussions about ultra-low fertility rates. This isn’t Italy or Japan.

This is Finland, named the happiest country in the world in a 2019 ranking - and was #1 in 2018 as well, #5 in 2017 and 2016, #6 in 2015, #7 in 2013 (there was no 2014 report), according to the World Happiness Report researchers, who combine both objective and subjective measures of well-being and life satisfaction.

And Finland has generous levels of parental leave provision:

Today In: Money
Maternity leave begins between 50 to 30 working days before the due date, and lasts for 105 working days, during which time Kela, the Finnish Social Security agency, pays a “maternity allowance.” Fathers can take paternity leave for a maximum of 54 working days and receive a “paternity allowance”; 18 of these days can be taken at the same time as the mother. Then “parental leave” continues for a further 158 days.

After parental leave benefits end, a parent can stay at home, unpaid but with job protection, until the child’s third birthday, and receive a “child home care allowance.” Or parents can choose a daycare center and receive subsidies based on income, paying nothing for low-income families and up to a maximum of EUR 290 for one child, per month, for higher-income families.

What’s not to like?

But yet, here’s the development of the fertility rate over the past decade (according to “Steep decline in the birth rate continued” at Statistics Finland and “The decline in the birth rate is reflected in the population development of areas” for the estimated 2019 rate):

Finland TFR
Finland's TFR 2009 - 2019FROM STATISTICS FINLAND
or, in graphical form,

Finland TFR
Finland TFR 2009 - 2019FROM STATISTICS FINLAND
What happened here?

Regular readers will recall that in August I profiled the declining Swedish fertility rate, and in the course of my reading I learned that its extreme cyclicality is attributed to the effects of certain parental leave and other policies causing parents to speed up births temporarily. Putting Sweden and Finland side-by-side (with somewhat less recent data) shows that Finland has been much more stable in its fertility rates, but has collapsed over this past decade.

TFR FInland + Sweden
Fertility Rates, Finland and SwedenFROM WORLD BANK, HTTPS://DATA.WORLDBANK.ORG/INDICATOR...OCATIONS=FI-SE
Is this due to a poor economy? Finland’s unemployment rate rose from a relative low of 7.7% in 2012 to a post-recession high of 9.4% in 2015 but has been declining since then, and now stands at a level of 6.7%, nearly again equal to its pre-recession low of 6.4% in 2008 – which itself is as low as its been since the end of the Cold War. The country’s real GDP growth rate had likewise dropped in the same timeframe, but then recovered and has only slowed slightly since then.

In an interview, Finnish Prime Minister Antti Rinne commented on the decline:

“’It’s a fact that parenthood has substantially reduced the pensions of women. Women’s careers and income development are the key issues we have to tackle to make sure those who are able and willing to start a family can do so. These are major issues,’ he commented.

“Another area in need of development are services, according to him.

“’I’m concerned that maybe we’re not focusing on the right things if we’re not developing the services of families with children. We have to construct the entire service network in a way that families with children feel that they are supported,’ he underlined.”

Do Finnish families feel that the benefits available to them are insufficient? Would a look into the finer points of the system reveal perceptions that the parental leave benefits are inadequate, or that there are waiting lists for daycare slots? Yet there does not appear to have been a worsening of conditions that needs to be rectified, so it’s hard to see this as a cause of this decline. What’s more, Finland was deemed to be the 4th most gender-equal country on the globe, according to the World Economic Forum’s analysis, behind only - you guessed it, Iceland, Norway and Sweden (Denmark, oddly, comes in at only 13).

Now, maybe the Finnish birth rate will perk up again unexpectedly, and perhaps this will turn out to have been a statistical fluke all along. But, as with Sweden, it calls into question the conventional wisdom that the path to replacement-level fertility rates is a combination of gender equality and generous social welfare provision.


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  #93  
Old 11-22-2019, 05:48 PM
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CHINA

https://www.wsj.com/articles/old-age...st-11574018820

Quote:
Old Age Will Put China to Rest
Retirees will be a fifth of its population by 2040, and productivity will quickly fade out.

Spoiler:
The trade tiff with China lingers on -- let's just cut a deal for zero tariffs and move on. Then we can tackle the next question: Is there any real chance that China -- with gross domestic product per capita lower than Mexico's -- could soon pass the U.S. in size and strength? The prospect is daunting, but we've been here before. Does anyone remember books like "Trading Places: How We Are Giving Our Future To Japan"? Me neither. The reality is that for every country, demographics is destination.

I recently attended the Sohn Conference in San Francisco, which raises money for charity by having hedge-fund managers pitch their best investment idea. Most talks were about broken stocks or esoteric cloud software companies hoping to double in value in three years. But Adam Fisher from Commonwealth Asset Management talked about decadeslong trends in China. (I didn't talk to Mr. Fisher directly: Silly securities laws prohibit funds from marketing broadly while they're raising money. So my notes will have to do.)

It turns out that China's work-age population has peaked or is close to peaking -- that pesky one-child policy worked. Even worse for Beijing, according to projections by the United Nations Development Program, China's 65-and-over population is expected to grow by more than 150%, from 135 million in 2015 to 340 million by 2040, which will be 21% of the population. That's a lot of retirees. By the way, the current retirement age in China is 60 for men, 55 for women, though both are set to increase gradually.

By comparison, Japan's 65-and-older population reached 26% by 2015. But as the saying goes, Japan got rich before it got old. What about China?

According to the political economist Nicholas Eberstadt, less than 65% of Chinese workers are covered by any retirement benefits. That share drops to 35% for urban migrants. That's many mouths to feed in old age.

And here's where it gets dicey. China's big coastal cities, Beijing, Shanghai, Shenzhen and Guangzhou, have already caught up with the wealthy countries of East Asia in terms of productivity and purchasing power parity. Mr. Fisher notes that sustained growth will therefore depend on improvements in China's inland. He calculates that western China would have to increase its total-factor productivity by 8% to 10% a year to pay for those 205 million additional retirees. Unless China develops an antigravity device or a perpetual motion machine, that's a virtual impossibility.

Recall what happened in Japan. Since its stock market peaked in 1990, Mr. Fisher says, total hours worked in Japan have dropped 20%. In the U.S., hours worked rose 40% in the same period. Even though Japan's productivity was higher than the U.S. (with a stress on "was"), its nominal GDP flatlined. Its government had to step in with increasingly worthless stimulus programs.

Japan's debt-to-GDP ratio has risen to an eye-popping 238%, while interest rates have dropped. The interest-rate decline has been partially offset by the strong yen. This was the great "carry trade," of which many hedge funds took advantage: Borrow cheap in Japan and invest elsewhere, though you'd lose some of the leverage when repaying the loans with a more expensive currency.

Mr. Fisher thinks something similar will happen in China. As its public sector -- yes, the Communist Party -- levers up to compensate for the GDP shortfall, interest rates will drop, then drop some more. Mr. Fisher thinks they're headed toward zero.

Why? Here's how the Federal Reserve puts it generally: "The overall boost to savings at the expense of current consumption caused by an increase in life expectancy puts downward pressure on r-star," the "natural" rate of interest. Also, more retirees mean lower output, so governments must intervene with stimulus as production drops.

China's currency is also a factor. Maybe the yuan will rise like the yen, creating another great opportunity for a carry trade. But no one can say (this is why macro investors have spotty records). Remember that unlike Japan, China will get old before it gets rich. Ever lower interest rates might mean an ever-weaker currency. Or they could mean China will prop up interest rates to protect its currency, which would further hurt its economy. A rock and a hard place.

Beyond an interesting investment thesis, this has global implications. China is a manufacturing powerhouse, but for how long? Rising wages mean its comparative advantage is leaking away. Productivity growth is its only hope. Think robots!

Unlike a one-child policy, productivity can't be legislated. It takes smart people with incentives and property rights to innovate and solve real problems. White House National Economic Council director Larry Kudlow told last year's Wall Street Journal CEO Council that China's "state run economics is doomed to failure. Doomed." As its population ages, we'll see if Messrs. Kudlow and Fisher are right.


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