Demography Is Destiny

As the American Baby Boomer generation approaches retirement, there are many problems we will face. We can predict that the average retirement age will rise, medical costs as a percentage of GDP will rise, lifestyles will not be what we expect, and there will be downward pressure on stocks as boomers sell assets to finance retirement, among other issues.

Today, however, we are going to look not at the U.S., but at the rest of the world. If we think of the U.S. problems as severe, then the facts suggest the rest of the developed world is facing a major crisis. Over the next few decades, we are going to see a shift in economic and political power that is simply staggering in its implications.

Martin Barnes and his crew at the Canadian-based Bank Credit Analyst have come up with some sobering conclusions on the subject:

Underdeveloped Countries: A Dramatic Population Rise

“The population of the ‘developed countries’ will drop rapidly over the next 50 years, while those of undeveloped countries, especially Islamic countries, will rise dramatically. Germany will experience no population growth and remains at 80 million people, while Yemen grows from 18 million to over 84 million.

“Russia will drop from 145 million to slightly over 100 million. Iran grows from 66 million to 105 million. Japan drops to 109 million, while Iraq and Saudi Arabia grow to 110 million. Italy declines from 57 million to 45 million, while Afghanistan grows from 21 to 70 million.”

These figures underscore a 100-page CIA report released in July 2001, entitled “Long-Term Global Demographic Trends: Reshaping the Geopolitical Landscape”. The report determined that “dramatic population declines have created power vacuums that new ethnic groups exploit. Differential population growth rates between neighbors have historically altered conventional balances of power… Our allies in the industrialized world will face an unprecedented challenge of aging. Both Europe and Japan stand to lose global power and influence…

“The failure to adequately integrate large youth populations in the Middle East and Sub-Saharan Africa is likely to perpetuate the cycle of political instability, ethnic wars, revolutions and anti-regime activities that already affect many of these countries. Unemployed youth provide exceptional fodder for radical movements and terrorist organizations, particularly in the Middle East.”

This 2001 report led the BCA to an interesting insight concerning the current situation in Iraq. “The cynical view is that the U.S. desire to attack Iraq is mainly about oil. That may be part of the agenda, but other long-term strategic considerations are probably at work.

Underdeveloped Countries: The Rising Power of Youth

“The growing number of young people in a number of unstable or troubled countries could work both ways. For example, there are signs that many young people in Iran want the country to move away from fundamentalism, toward a more relaxed regime. The rising power of youth can be a force for positive change as opposed to instability. However, there will be a huge challenge in bringing democracy to countries that have no history of it. This will be especially true if the global economy is struggling because poor demographics are undermining demand in the industrialized world.”

The world economy is currently dominated by the U.S., Europe and Japan. These studies show that there will be little or no help from Europe and Japan with regard to world growth. The world is already far too U.S.-centric; everyone wants to sell to the U.S. consumer. Our international trade deficit, which in January was over $41 billion, simply cannot be sustained.

The BCA suggests that the Japanese government debt will grow to 300% of GDP in the coming decades. To put this into perspective, think of it as the equivalent of a $36 trillion dollar U.S. debt. Even with zero interest rates, this is a staggering sum.

The Japanese economy cannot handle such a deficit without turning on the printing press in a manner unprecedented for major countries. It is hard to imagine the dollar, as weak as it may be, dropping against such massive and mounting deficits financed by attempts at inflation.

Europe is already spending a very small percentage of its budget on defense. As one wag puts it, they will be faced with a choice: “guns, or rocking chairs?” With a declining population, they will be hard-pressed to find enough bodies to man their military as it currently exists.

Unless they unwind their pension promises, Europe will play a smaller role in the world of the future, notwithstanding the view from France. The role of Asia, especially China and India, will be far more significant in the future world of our children.

Underdeveloped Countries: Coming Turmoil

The problems outlined in the two studies suggest that turmoil is coming to the developed countries of Europe and to Japan. They cannot pay for their promises to retirees and still grow their economies; they will have to choose one or the other. If they choose higher taxes and fewer opportunities, the best of young Europe will vote with their feet, as did their ancestors in the 18th and 19th centuries. That will only make their situation worse. But can a majority retiring population vote to cut their benefits?

In short, for the world economy to grow, developing countries are going to have to look to themselves for growth. The aging developed countries will simply not continue to constitute the growth engine they have been for the last half of the last century.

For forward-looking investors, this means there will be real business growth opportunities in the emerging markets and those countries which can sell to them.

As the BCA noted, it is critical that the Iraqi experiment in democracy be successful for the future stability of the world. In 1945, there were many who thought it would be impossible for the regimented Japanese to establish a successful democracy. Today, we watch as China moves toward a capitalist economy and democracy. What stock market performed the best last year? It was Russia, who – not coincidentally – has some of the lowest tax rates.

Call me naïve, but I do not think the primary consideration for the Iraqi war was/is oil, American hegemony or establishing a democracy in Iraq. But I do think that the current U.S. administration intends to use the event to do its best to bring about a thriving Islamic democracy.

The Iraqi people are educated, entrepreneurial and business-oriented. Given the chance, I expect they may surprise many in the world with how fast they rebound. Given their explosive population growth rate, they could become an engine for growth in the region. If Bush is serious about helping Iraq, he should get rid of any and all trade barriers with the new regime and stand back and let the free market work.

Only a few years ago, we were fearful of the Chinese hordes and their army. They were the enemy. Today, our economies are so inextricably interwoven that it is in our best interest to work any problems out peacefully. We now depend upon each other. If we want to find peace with Iraq and the Arab world, we need to find ways to establish economic ties with them as well.

I hope this is a beginning. If it is not, the demographic issues I outlined above will have very negative consequences for us, our children and our grandchildren.

Best regards,

John Mauldin,
for the Daily Reckoning
March 27, 2003


The bad news continues to trickle out as though from a leaky sewage pipe.

Credit card delinquencies are at a new high. So are mortgage foreclosures. As people borrowed more and more against the ‘equity’ in their houses, they found it harder and harder to make the payments. But the borrowers didn’t seem to notice…and the lenders didn’t seem to mind; refinancings continued to rise alongside foreclosure rates.

In the last two weeks, however, either the borrowers have been distracted by war on prime time…or they’ve finally begun to come to their senses. Or maybe a slight increase in mortgage rates caught their eyes just as they were getting ready to sign on for another $20,000 slug of debt. Whatever the cause, refinancing activity has fallen over the last couple of weeks, with the most recent week’s activity 9% below the previous week.

Consumer confidence is at a 10-year low. And as reported here yesterday, debt is growing at its fastest pace in 15 years.

And how’s business? Like the rest of the financial effluent, it is smelly and repulsive. A “Grim Earnings Season” is how describes the most recent reports.

Even the news from the Iraqi front is a little grim. While the situation could change by tonight’s news, so far, the Iraqis do not seem to appreciate their liberators. If this ingratitude continues, the price tag for installing a puppet government – oops, we mean bringing freedom to the Iraqi people – could rise well beyond the $75 billion Bush has asked for to see him through September.

While we have no doubts about the nobility of the cause, we can’t help but wonder whether bringing democracy to the desert might turn out to be a little like building an expensive opera house in the jungle: it might look good for a while, but it would soon have vines growing through the unused air-ducts and bird droppings on the carpet – while the bonds sold to pay for the project would still need to be paid.

Not that we have any better idea than George Bush or Alan Greenspan of what will happen. It’s just that this Lenten Season finds us unusually worried. Maybe the war will turn out well…but maybe it won’t. Maybe the dollar will hold up…but maybe it won’t. Maybe stocks and the economy will enter a new boom phase…but maybe they won’t.

“As usual,” writes the Mogambo Guru with his customary reserve, “I look for the dark cloud. But when the cloud is this big and that dark, and heavy, threatening clouds cover the earth like a death shroud from pole to pole, lightning bolts and flash floods everywhere, the silver lining that I am instructed to be on the lookout for may, truly, be out there, beyond the horizon, but I can’t see it.”

Nor can we. If things go well, we might reasonably hope for a modest boom in the stock market…as the nation’s lumpen investor/voters celebrate the quick and easy victory over Iraq that they expected. Should this happen, dear reader, you are advised to use it as a selling opportunity. Because it will be followed, most likely, by a bust, in which the correction that began in March 2000, made worse by procrastination and more debt, resumes.

If things go badly…on the other hand…

While America cannot lose the war in Iraq, it can make a mess of it. If that happens, the dollar could be the biggest casualty. And if the greenback goes down, it could “unleash the demons of hell”, as the Mogambo Guru puts it.

These demons will be worse than any we’ve ever seen, he continues: “Economic demons from Hell are what you got in the Old Days! These new demons are actually even worse! These economic demons are the ones that the regular demons in Hell are afraid of!”

So there! What are you worrying about?!

[Editor’s note: You can read more from the ‘Gambo here: The Second Coming of The Stock Market?]



Eric Fry, reporting from New York…

– President Bush rallied the troops yesterday, but failed to rally the stock market. A cock-sure and confident Commander-in-Chief addressed the troops yesterday at a hangar at McDill Air Force Base. “We will be relentless in pursuit of victory,” Bush proclaimed with a half-snarl. Unfortunately, the inspiring oratory did not inspire investors to buy stocks. The Dow lost 50 points to 8,230, while the Nasdaq dipped 3 to 1,387. Weakness on Wall Street pulled the dollar lower against the euro for the third straight day. The greenback fell about half a percent to $1.0687 against the “currency of the doves”.

– Meanwhile, a relentless barrage of hostile economic data has the forces of recovery pinned down in the trenches. U.S. durable goods orders dropped in February for the third month in four, while new home sales tumbled to their lowest level in more than two years.

– Orders for durable goods fell 1.2%, according to the Commerce Department, while orders for non-defense capital goods excluding aircraft fell more than twice as much. In other words, the private sector is sitting on its hands…and home-buyers are sitting on their wallets.

– New home sales plummeted 8.1% in February, as the inventory of new homes increased to a five-month supply. That’s the largest inventory of unsold homes since December 1996, which suggests that the housing market is cooling, if not heading into a deep freeze.

– Most of the learned economists blame the advent of war for the nation’s sluggish economic activity. But we suspect that the postbellum U.S. economy – whenever that might arrive – will bear a striking resemblance to the current one. In fact, we may discover that spending $75 billion – or even $175 billion – to blow up buildings in the Iraqi dessert is distinctly “unbullish” for our economy…although it might be bullish for gold.

– In the months leading up to the Iraqi conflict, stashing a few gold bars under the mattress seemed like a reasonable idea. Accordingly, the safe-haven metal soared roughly 20% between early December and early February, only to relinquish the entire gain over the last few weeks.

– As the build-up to war gained momentum and a swift American victory seemed baked in the cake, the gold price underwent a reverse alchemy – falling like lead. Initially, Defense Secretary Donald Rumsfeld assured us that “shock and awe” would topple the Iraqi regime faster than you can say “fedayeen”. But he has since revised his outlook to allow for the possibility that the Iraqi campaign might last for a few months. Given the uncertain duration and ferocity of the Iraqi conflict, gold may quickly regain its luster. In the event, folks may wish to hang on to their ingots, or perhaps stuff a few more of the shiny lumps under their mattresses.

– And let’s not forget the U.S. dollar. Even without our expensive war in the Middle East, the greenback would be a currency under the siege of a soaring current account deficit. The dollar has been weakening for months and, as every gold bug knows, the dollar’s weakness is gold’s strength.

– The reason to own gold is not the battle for Baghdad, but the battered U.S. dollar, says John Hathaway, manager of Tocqueville Gold Fund. Over the long term, he asserts, foreign investors will tire of funding America’s ballooning deficits. As they retreat from U.S. assets, the dollar will slide, thereby boosting the gold price.

– “We’re about to see some shock and awe in the gold market,” my friend Jay Shartsis told me yesterday. “The gold shares are about to mount a major advance.” Jay, a successful long-time options trader and occasional contributor to the “Striking Price” column in Barron’s, tells me that put-buying on many gold shares is soaring. This contrary indicator reflects widespread bearishness toward gold stocks, which is a bullish indicator.

– Typically, extreme bearishness precedes strong rallies. To illustrate his point, Shartsis notes that put-buying on the XAU Index of gold stocks has reached the highest levels since last October, immediately prior to a major rally. Shartsis also notes that put-buying on Newmont Mining is “the heaviest is has been in several years”…Gold investors take note!


Back in Old Europe…

*** Gold rose above $330 yesterday. A quick and easy victory in Iraq could cause gold to go down again…as investors confuse military might with financial strength. More likely, the yellow metal has found a little firm ground and will stand there for a while. Of course, anything could happen. Anything could happen…but not many things would make the price of gold go down. Quite a few could make it go up.

*** A young man with a promising future:

WASHINGTON (Reuters) – A New Jersey teenager who became the first U.S. minor ever charged with securities fraud 2 1/2 years ago, is now running for political office.

In his hometown of Cedar Grove, Jonathan Lebed said he is a candidate for one of two open seats on the five-seat town council. He is 18 and graduated from high school last June.

When he was 15, Lebed agreed to pay $285,000 to the U.S. Securities and Exchange Commission.

*** Your editor missed his deadline yesterday because of a domestic incident: He was summoned to the principal’s office at his son Edward’s school.

The school is supposed to be one of the best in Paris. Its director looks a little like Victor Hugo, with a white beard encircling a stern 19th century face. If he had not gone into education, he might have made a good field marshal.

With hardly a moment’s delay, he read a review of Edward’s situation as if it were a battle report…so stark, direct and honest that it might have brought a tear to a mother’s eye and caused a father to review his Last Will.

“The boy is on the edge of trouble. His grades are on the borderline. He doesn’t pay attention. He rarely completes the work that is assigned to him and it is rarely checked by the parents. His math is acceptable, but his level in French below the acceptable level. He seems happy, but the other students sometimes make fun of him…partly because he is a bit of a class clown and partly because his work is so poor.”

When he was finished reading, the field marshal raised his head. “Your response…?” he asked.

Elizabeth was ready for him. She explained that she was aware of the problems and that she had hired a tutor to work with him. She pointed out also that he had made progress on his most recent report card.

“Do you speak French at home?” continued the interrogation.

“No, we speak English,” came the answer.

“How then can you expect your child to succeed in school? This is a difficult school. It is competitive. Your son has a disadvantage. I suggest that when you are in France, you live like French people…speak French…eat French food. If you speak French at home, I can guarantee you that Edward will improve. He will be less confused about how to form sentences…how to think in the French way and how to approach problems…”

The meeting ended with a treaty. The parents agreed to speak French at home during the week. The field marshal agreed to take Edward at least until next October.

*** “That’s ridiculous,” said Maria, 17, upon hearing the armistice results. “Who does he think he is? There is no way I’m going to speak French at home. Besides, Dad and Grandma can barely speak French at all!”