This note was originally published at 8am this morning, October 15, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“The power of population is indefinitely greater that the power in the earth to produce substance for man.”
Any regular reader of our work, especially when Keith is penning the Early Look, is familiar with our work on investment durations. Our investment process enables us to develop investment ideas on 3 durations: TRADE (3 weeks or less), TREND (3 months or more), and TAIL (3 years or less). We call this our Trade-Trend-Tail Process.
There is, of course, another duration, which I will simply call the longer term. This is the time frame beyond 3 years. While it is difficult to make an investment decision today, for an event that will happen beyond 3 years, that doesn’t mean we shouldn’t be contemplating the longer term. One key force that will shape the longer-term with some predictability is demographics.
One of the most well known and earliest recorded demographers was the Reverend Thomas Robert Malthus. His primary work on this front was his treatise, “An Essay on the Principle of Population”, which he published in 1798 at the age of 32. Malthus started with the basic premise that society could not be improved with time, so as population increased, so too would the constraints on that society. Eventually, a large enough population would not be self sustaining and, as Malthus wrote:
“The superior power of population cannot be checked without producing misery or vice."
In contrast to Malthus, if we have learned anything over the last few centuries it is that the welfare of societies can and will improve with population growth in conflict with Malthus’ primary tenet, but Malthus did leave us with a few salient points: 1) demographics are powerful and 2) changing populations will constrain societies. Below we’ve outlined 3 key Malthusian Tails that we are focused on.
1. Marriage Rates in the United States - We wrote an intraday note on this point to our Hedgeye Macro subscribers earlier this week (if you aren’t currently receiving our full product, please email us at firstname.lastname@example.org to set up a trial); in the last decade we have seen a dramatic shift in marriage status among young adults. In fact, in 2000 almost 55% of the 25 – 34 cohort was married, while 35% was never married. Amazingly less than 9 years later, by 2009, only 45% of that cohort was married, while 46% of the cohort was unmarried.
Naturally, as people marry later, birth rates will decline, which will lead to lower population growth in the future and the ability, or lack thereof, to fund future entitlement programs. Additionally, and near and dear to our Housing Headwinds call, is that homeownership rates are impacted by this demographic shift. According to the most recent data from the Census Bureau, homeownership rates are 84.2% for married couples and 50.3% and 59.6% for male and female singles, respectively.
2. The Aging Japanese Population – One of our Q4 themes was entitled, Japanese Jugular, which describes our long term negative view of Japan. Once again, a key driver here is demographics, in particular the aging of society. In 1985, roughly 10% of Japanese society was over 65 years old. Currently, almost 23% of Japan’s population is over 65 years old. The great Keynesian experiment in Japan will likely eventually fail because of this aging of society, and its future demands on the government as it relates to retirement and healthcare entitlements.
Currently, the ratio of retirees to working-age Japanese is equal to 35.5%. In just ten years time, that ratio will be equal to 48%. We’ve likely already seen the negative inflection point in this trend within the last year, as Japan’s pension fund announced it will be increasing its asset sales by a factor of 5x to support pension payment requirements.
3. The Aging Baby Boomers in the U.S. – Our Healthcare Team, led by Tom Tobin, presented a Black Book on this topic last week, which was titled: “HEDGEYE HEALTHCARE: AGING OF AMERICA: DEMOGRAPHICS OF DEMAND AND PROFITS IN HEALTHCARE.” (If you are an institutional investor and would like to sample or trial some of their superb work on the Healthcare sector, please email email@example.com.)
In effect, the glacial movement of U.S. demographic trends holds specific consequences both for healthcare and the larger economy broadly. For Healthcare investors, the Baby Boomer investing dogma mistakenly centralizes per capita spending as the core driver of the thesis.
While absolute per capita consumption is higher for those in their 70s & 80s, the growth rate of healthcare consumption is slower and there are far fewer people to support it. The period of greatest acceleration of per capita consumption comes as people age into their 50s - a demographic now in the heart of a secular decline which won’t see bottom until 2018.
Boomer Employment (45-64 yr olds) reached its crescendo in the 1993-2002 period with peak earnings and peak disposable income occurring alongside historic lows in unemployment. Now, with this segment of the working population in deceleration mode, the U.S. workforce nearing a peak in average age, and the echo boomer generation (30-39 yr. olds) years away from peak consumption growth, the healthcare and broader economy face significant long-term headwinds.
At risk of starting off your weekend on too somber of a tone, I will leave you with one last aging quote from Groucho Marx that is counter to our thoughts on demographics:
“Age is not a particularly interesting subject. Anyone can get old. All you have to do is live long enough.”
Yours is risk management,
Daryl G. Jones