How the United States can benefit from a graying global population

How the United States can benefit from a graying global population

The United States is getting older.  However, the rest of the world is getting older faster.  The “Great Powers” that have dominated history over the past few centuries are quickly becoming smaller and older.  The United States has a demographic trend which will allow it to maintain superiority over other countries over the coming decades.

I recently read an article on the Pacific Standard which argues that global ageing can actually work in the favor of the United States and ensure that its economic and military dominance can continue well into the middle of the century.  The United States is getting older, but at a slower rate than many of the “near peer” competitors around the world.  

Germany

France

China

Demographics are a danger to countries such as Japan and Russia which are seeing the greatest decrease in population, with Japan declining almost 20M and Russia 40M by 2050.  In 2006, Russian President Vladimir Putin was quoted as saying that demographics are “Russia’s most acute problem today.”  In a previous blog I explored the effects that an ageing population will have on Japan as well as the costs to society and the economy.  Germany and France are following similar trends with a modest decrease in populations coupled with an over 65 age group of almost 30%

	Population in 2013	Population in 2050		% of population over 65
Country
Russia	143,300,000	104,258,000		27.96%
Germany	81,726,000	70,805,000		28.75%
France	65,436,552	61,832,000		29%
Japan	127,520,000	109,220,000		35.10%
China	1,347,350,000	1,462,058,000		24.10%
United States	315,157,540	397,063,000		21.5%

The population pyramids above give a good visual representation of population trends going into the future.  Most countries have already had their “youth bulge” which gave a demographic dividend in the form of young people entering the workforce.  These youth bulges match times when countries go through an economic boom due to the influx of human capital into their populations.  We saw this in Japan when its economy grew after the Second World War, and can see the after effects with the current stagnant economic growth.  The United States maintains a healthy base of young people who will enter the workforce in the next few decades relative to its older population.

Japan

Population changes can be attributed to fertility rates and immigration policies.  All industrialized countries are experiencing lower fertility rates, but only the United States has a healthy immigration policy to maintain its population.  Japan, Russia, and Europe have been extremely resistant to immigration and we can see the rise of right wing parties in Europe which will further prevent new immigrants from joining their populations.   Developed countries around the world would need to radically increase immigration policies or fertility rates in order to reverse the trends we are predicting for 2050.

However, it is probably China which will see the most dramatic ageing of its population.  Many people have often wondered if China will become old before it becomes rich. 

“...China’s current independence ratio of 38 is unprecedentedly low. This represents the number of dependents, children, and people over 65, per 100 working adults. This implies that there are nearly twice as many working age people as the rest of the entire population combined. This historically low dependency ratio has been extremely beneficial for China’s unprecedented period of economic growth. This dramatic shift was brought about largely in part due to China’s one-child policy. As a result China is currently aging at an unprecedented rate. China will be older than the United States by 2020 and by Europe by 2030. Combined with the sex-selective abortions widely practiced as a result of the one-child policy– China will have 96.5 million men in their 20s in 2025 but only 80.3 million young women – China’s future demography holds many challenges for the Communist party….”  (Wikipedia)

Already there have been reports of labor shortages in China to meet demand for workers and that wage inflation has begun to affect the Chinese workforce.  These would erode the traditional competitive advantage of China for the past 30 years which has been a low cost of labor.

Russia

United States

Experts believe that the ageing of the Chinese population can lead to a 1% decrease in GDP growth per year until the 2020’s.  It should also be stressed that China is relatively poor compared to other developed countries, with a GDP per capita of $5,417 vs. $48,328 in the United States, so it is indeed possible that China will not be able to catch up fast enough to match the affluence of the US.  China has also not saved enough for the future, with an estimated 80% of households having less than one year of income saved for the future. 

The costs for ageing populations will be in the form of increased health costs and increased taxes.  Health costs for seniors can run between 3 to 5 times that of the younger population.  Increases in taxes would act as an economic drag on growth and investment.

The military advantage that the United States enjoys against the rest of the world can be expected to increase as time goes by.  At present, the Pentagon spends $664.84 billion per year (though there are probably going to be cutbacks during and after 2013).  This represents more than the next 19 largest spending nations combined.  The age advantage of the United States is an asset because more of the defense budget can be spent on weapons procurement, technology, rather than personnel and pensions.  The US spends 1.15 more on personnel than weapons purchases, compared to about 2.5 times more in France, Japan, and Russia.  The militaries of these countries would also need to compete with the civilian economy to get skilled labor which could also put stress on economic growth.

There is no doubt that the United States is experiencing great challenges today.  The economy is still lurching forward after the economic crisis of 2013 and budget cuts can have a great effect on American society.  However, there is no power which looks like it is on track to challenge the economic and military supremacy that the US has today. 

Ageing Trends in Japan (and why it affects us) part 2#

Ageing trends in Japan (and why it affects us) part 2#

In my previous blog, I discussed the macro effects of an ageing population in Japan.  Now I will focus on the micro level and how this will affect the individual consumer.  This is designed to be a learning tool for other societies as well since what happens in Japan can very well be a leading indicator to what happens in other societies.  Here are some examples of how elderly trends are transforming consumer purchases. 

Eating out:  Elderly people like to eat out, but are less likely to spend a great deal of money on meals.  The trend has been for high end but affordable restaurants.  a chain of restaurants run by Value Create is serving up top-end French and Italian food designed by “super chefs” in a bistro environment. (Japan Pulse)

Food: the ageing population is focused on preserving their health through food, they are particularly concerned about hypertension prevention and improvement in their blood glucose levels.

Value purchase: “As the aging society proceeds, elderly people are re- evaluating such retailers like convenience stores that sell small packaged foods” said Fujiwara. “The elderly people buy things that have value even if the price is high. They are the group which has that financial power.” (Bloomberg)

Shopping environment:  Ageing shoppers are forcing retailers to retool their businesses. Daiei, based in Tokyo, is slowing escalators to two- third of the speed of regular ones and employing lighter shopping carts using aluminum at some stores. (Bloomberg)

Exercise:  Hobbies for elderly but active women are hiking mountains and going fishing. These women begin their pursuits by buying all the latest fashionable equipment for the respective activities at specialty sports stores.  Marathon running is a sport which is very common among elderly citizens and requires special running attire and paraphernalia

Tomato diet:  A diet fad surfaced in 2012 with the appearance of the tomato boom. It was kicked off by the publication of a study that appeared to indicate consuming large amounts of tomato juice would help alleviate metabolic syndrome.  The trend has slowed down but was still quite popular. 

Adult Diapers:   The market for adult diapers is growing in Japan and is expected to continue for some time.  Companies can focus on adult diapers which are comfortable and less obvious in order to capture market share and establish a successful brand.

Transportation:  Automobile driving is designed for people with average reflexes.  Elderly people drive less due to poor eyesight and reflexes.  Japan is focusing on bus services for elderly people to public transportation.  Some suggestions have also been to slow down the time that doors close on subways to accommodate seniors. 

 Social gatherings:  Increased efforts to include elderly in social events will be important.  Elderly people value families so technology to enable more family interaction will be important.  Some 180,000 Japanese live in “Alzheimer Group Homes” and about 2 million (the majority with some dementia) regularly attend adult day care — far higher numbers for these services than in any other country.

Beverages:  A popular drink in Japan among older people, and among the 30 to 40 year old demographic, was a drink called Mets Cola by Kirin which helps reduce the absorption of fat.

(photo by dantada on Morguefile)

Ageing trends in Japan (and why it affects us)

Ageing trends in Japan (and why it affects us)

Japan is a country that is ageing at a rate faster than almost any other country in the world.  This will have a number of drastic changes in Japanese society.  However, we would be wise to pay attention because the changes taking place in Japan will affect the rest of the world eventually

“…more than 20% are over the age of 65 today. In 1989, only 11.6% of the population was 65 years or older, but projections were that 25.6% would be in that age category by 2030. However, those estimates are updated at 23.1% (as of February 2011) are already 65 and over, and 11.4% are 75 and over…”  (Information is from Wikipedia)

Some projections state that, by the year 2050, about 35.7% of Japan’s population will be over 65.  In 2050 the child population, meaning those who are 15 and under, will drop to approximately 10.8% (down from 13% today).  Taken together, this means that in 2050 there will be approximately 3.5 elderly Japanese for every child.  It is unlikely that the human race has ever experienced such a top heavy population pyramid.

The reasons for this are attributed to increased life expectancy and low fertility.  In addition, it should be pointed out that Japan has one of the lowest levels of immigration in the world and remains one of the most homogeneous societies on Earth.  It has been said that the population growth and relative youth of both Canada and the United States have been due to relatively high levels of immigration, coupled with successful integration of immigrants.

The effect that this will have on Japan is profound.  The dependency ratio, meaning the number of dependents (children and elderly) compared to the working population aged 16 to 64, will be approximately 0.86.  The ratio of working population to seniors will be approximately 1.5.  This will put stress on retirement plans as well as health care.  The increasing proportion of elderly people also had a major impact on government spending. Millions of dollars are saved every year on education and on health care and welfare for children. As recently as the early-1970s, social expenditures amounted to only about 6% of Japan's national income. In 1992 that portion of the national budget was 18%, and it was expected that by 2025, 27% of national income would be spent on social welfare (Wikipedia).  As a contrast, the military budget of Japan has been about 6.5% over the past few decades. 

To further illustrate the effects of how an ageing population would effect Japan, a study by the UN Population Division released in 2000 found that Japan would need to raise its retirement age to 77 or admit 1 million immigrants annually between 2000 and 2050 to maintain its worker-to-retiree ratio.
In addition to the dependency ratio, there would be other effects to Japanese society. Along side increased government spending on health care and pensions, those in retirement tend to pay lower income taxes because they are not working.  This would further decrease government revenues in Japan at a time when the debt to GDP ratio (as of 2013) is 228%.  Those in work may have to pay higher taxes. This could create disincentives to work and disincentives for firms to invest, causing a fall in productivity and growth.
An ageing population would lead to a shortage of workers which would drive up wages and potentially increase inflation.  Sectors that would be growth sectors would be medical devices, retirement homes, and pharmaceuticals. 

In addition to economics, the ageing population will have an effect on foreign policy.  Having an ageing population would make it more difficult to recruit soldiers for the armed forces.  Europe and Russia have had challenges meeting recruiting goals for their militaries.  However, some argue that this can be offset by improvements in military technology.  An unprotected country is vulnerable to aggressive neighbors.  Some have argued however that an ageing population would lead to a less aggressive foreign policy since older populations are less likely to rely on armed conflict to settle disputes.

In conclusion, the ageing of Japan will have a great impact on their society.  However, Japan was selected for the topic of this essay because they are at the forefront of global ageing.  Countries in Europe, North America, Asia, and the Middle East can all expect a variation of these effects on their societies as time moves on. 

(photo by dantada on Morguefile)

"I will not direct you to our website..."

“I will not direct you to our website...”

I would like to propose a change to business practices that are taking place today.  I believe that this would be a disruptive innovation which flies in the face of conventional wisdom.

Too often, when you call up a company and ask for information about the company, too often the first response is “have you looked at our website?”  I believe that this is not only disrespectful to the client, but it shows a measure of intellectual laziness on the part of the person whom the client is speaking to.  It becomes a crutch that the employee can use so that they do not need to address the problem directly.

The problem is thus, we know that the company has a website.  If the problem could be solved by looking at the website we would not bother calling the company in the first place. 

Sadly, too many companies are going down this road.  They have used their website as the solution to all client problems. 

I am of the personal belief that computers have had potentially disruptive effect on the way that human beings relate to one another.  We have gotten lazy.   To often we assume that if we put all of our information on our website it eventually clients will take the time to read the website and we will not need to be bothered dealing with them.  I believe that the next disruptive step in business will be to turn the clock back and take a step back from our websites.

The human race is basically a social race.  Ever since we were hunter gathers we have engaged in behavior which is inherently social.  In fact, many readings have suggested that many of our habits date back tens of thousands of years.  Evolution takes a long time and we have not yet changed much from the time we did from our hunter-gatherer days.  Maybe in a few thousand years of using social media and computers we might evolve into something called homo informatus. But now we need to address our human needs now.

There are those who suggest that social media sites like LinkedIn and Facebook are actually taking away from our social contact with one another.  Sure they are useful tools, but are not a substitute for human contact with one another.  After all, now many Facebook friends would come to help you if you had a serious emotional issue?

An innovative step would be for a company to train their employees to engage the client socially before directing them to the website.  The website should be used as a last step after the employee has addressed the inquiry.  The first stage of the conversation will begin “I will not direct you to the website”.  Not only does this show respect to the client, but it will force the employee to take responsibility for the problem and give the client proper service.   By engaging the needs of the client directly, the company is giving a level of attention which has been somewhat lacking in today’s business climate.  Hundreds of companies rely on websites as their primary mode of information and giving more personal attention would run against the current of information media. 

Remember, people want service, but they also want community.  Human beings need to interact with other human beings.  Our ancestors gathered in festivals during celebrations and holy days.  A few generations ago our forefathers would attend church service together.  We used to attend sporting events together.  By addressing that need for community we can provide a far superior form of client satisfaction.  

(photo by mconnors on Morguefile)

The Ultra-Value Investment Portfolio

The purpose of this blog entry is to run a simulation of value stocks.  Being a CFA candidate as well as an avid investor, I have always been more of a value investor rather than a growth investor.  I have always believed in the principle that many financial markets obey certain laws that that, ultimately, all values converge towards the median.  This is especially true with the law of large numbers, the more stocks we include in a portfolio, the more likely the portfolio as a whole will converge towards equilibrium.

Many years ago, I had the opportunity to test this theory with a stock simulation program which allowed you to test a portfolio against other participants.  Since I was studying portfolio management, I wanted to test the theory that a value portfolio using stocks that had very low P/E ratios can outperform most of other portfolios.  By looking at a list of stocks and selecting the lowest P/E stocks, I was in fact able to outperform as many as 95% of my peers in the simulation.  A great deal of time has passed and we have a great deal of additional information available to us in which we can not only reach out to a wider equity market, but we can also gather more information in order to test theories.

The Ultra-Value Investment Portfolio

What I wanted to do was run a simulation of a portfolio which was made up of value stocks were both cheap in terms of earnings, but still robust enough to survive.  The Portfolio was going to have a value of approximately $100,000.00.  Since I had no preference over any stocks I wanted to weigh them all equally.

The parameters were as follows

1/ The P/E (Price Earnings) ratio had to be low.  In this case, under 15
2/ I wanted to avoid extremely speculative stocks and wanted to focus on small cap stocks which I believe would have the potential to grow faster.  The Market Caps I selected were both small and Micro.  This would include companies with a Market Capitalization between $20 Million and $300 Million.
3/ the stocks had to be financially robust with a viable asset base and no crippling debts.  I would only include stocks which had a Quick Ratio (Current Assets over Current Liabilities) over 1.
4/ the stocks had to trade on the NYSE

When I ran the values in the stock screener I was given 15 stocks.  I figured that this would be an acceptable number since it would be diversified enough to reduce any company specific risk that might exist in the portfolio.

The stocks, in order of rising P/E ratios were as follows.

Ticker	Company	Industry	Country	P/E
BORN	China New Borun Corporation	Beverages - Brewers	China	1.22
ZA	Zuoan Fashion Limited	Textile - Apparel Clothing	China	1.74
XNY	China Xiniya Fashion Limited	Textile - Apparel Clothing	China	2.29
CGA	China Green Agriculture, Inc.	Agricultural Chemicals	China	2.3
SRI	Stoneridge Inc.	Auto Parts	USA	3.79
TGS	Transportadora de Gas Del Sur S.A.	Gas Utilities	Argentina	5.93
BTH	Blyth, Inc.	Personal Products	USA	7.11
STV	China Digital TV Holding Co., Ltd.	Application Software	China	9.08
GGS	Global Geophysical Services, Inc.	Oil & Gas Equipment & Services	USA	9.42
KAI	Kadant Inc.	Diversified Machinery	USA	9.46
CO	China Cord Blood Corporation	Medical Laboratories & Research	Hong Kong	9.74
UFI	Unifi Inc.	Textile Industrial	USA	12.2
CFI	Culp Inc.	Textile Industrial	USA	12.7
REX	REX American Resources Corporation	Specialty Chemicals	USA	13
ARSD	Arabian American Development Company	Chemicals - Major Diversified	USA	14.4

This represented 8 stocks in the United States, 7 in China (including Hong Kong) and 1 in Argentina.   Even though it should be no surprise that the majority of the stocks were in the two largest economies in the world which together account for approximately 31.4% of global GDP, I would have preferred more geographical diversification.  There was some more variation in terms of industries but one can see that the textile industry weighed heavily with 26.66% of the portfolio being textiles.  This should come as no surprise since the Textile industry, as well as the energy and oil and gas industry, are traditionally value stocks.

Having created my portfolio, I will now monitor it and see how it performs relative to the broad market.  Over time I may choose to eject stocks that have a P/E ratio which rises above the 15 threshold in order to preserve the initial parameters.

I would like to add that this portfolio is purely an academic exercise and is in no way an attempt to sell any of the stocks mentioned above.  Over time I hope to gain insight as to how such a portfolio would perform in the market. 

Things that may be available sooner than we think

“The future ain’t what it used to be”

Yogi Berra

Growing up there were many ideas that we thought were futuristic.  Some were given to us from science fiction writers who had a vision of the future, some by futurists who believed that technology was going to evolve to a point where our way of living was going to be transformed.  Some seem to be wildly off the mark (the flying Delorean from the “Back to the future franchise” springs to mind).  But some seem to be coming to us sooner than we think.  Here is a list of concepts that I believe will be made possible in the relatively near future. 

Full automation:  Manufacturing has been transforming extremely rapidly in the past few years.  Following the Second World War, most manufacturing was focused in North America and was a very labor intensive model.  Manufacturing is now moving offshore to low cost producers.  Recently it was in China, but even more recently manufacturers are moving to even lower cost producers than China.  But what if we were able to take away the human capital from manufacturing?  Technology in the field of automation would make human labor a thing of the past and factories would be completely self-automated.  Imagine a factory being run with only one human overseer (if even that) while still able to run efficiently and with a degree of perfection that humans cannot perform.  Already we are seeing manufacturing being performed by 3D printers which can potentially allow someone to build something in their own home.  Robots begin to take over more roles that have been traditionally done by people.  

Remember that we make more food today with only 2 percent of the working population devoted to agriculture than we did when 90 percent worked in agriculture.  Manufacturing seems like the next logical step.

Virtual Reality:  The first steps have begun already.  Online media outlets (like Facebook and LinkedIn) enable people to live networked and online without the need for physical interaction.  We already create virtual worlds as seen by the popularity of online sites such as World of Warcraft and Second Life.  Goggles already exist which would allow someone to experience an online world in full 360 vision.  Technology is gradually moving to the point where virtual worlds can be experienced in all 5 senses, not just sight and sound.  A Matrix-like reality that seems indistinguishable from the real world and can fool the brain into thinking it is real.  At the rate we are going we should see the first iterations of this in the next few years. 

Less Physical stuff:  Books become converted to PDF’s, music and movies get downloaded rather than sold in CD format.  Family photos are archived in digital format.  Paintings can be portrayed on digital screens (and changed depending on the whim of the home owner).  Computers that were once the size of a living room are shrunk down to the size of a pamphlet.  TV’s which you can fold up and put up like a poster.  An “Omni tool” which will replicate an entire workshop of tools by morphing into different shapes, depending on the need.  People can move to a new country with one suitcase.  People stop buying cars because the public transportation system covers an entire city in an efficient transportation grid.  Print newspapers and magazines become extinct. 

Infinite Energy:  Already countries around the world are groaning under the need to supply energy to a rapidly growing world.  The Pentagon issued a statement a number of years ago that Energy independence should be a strategic priority for the United States.  Using military power to secure energy sources becomes more difficult over time.  Countries like China and Japan compete for resources in the South China Sea.   The traditional resources based energy economy becomes more obsolete.  New energy sources need to be found.  Mini- Nuclear power plants supply power to individual cities.  Solar power plates the size of Arizona can float in space and send back energy via microwaves.  Geothermal power harnessed directly from the Earth’s core.  Wind power fields that cover New Zealand and become the new “Saudi Arabia” of renewable energy.  Fission technology which would split atoms and allow a glass of water to power a city. 

In addition to providing more energy, our society would simultaneously find ways to use less.  Energy efficient cars, energy efficient homes, and other improvements make our energy footprint smaller. 

Unlimited Food:  This really ought to be possible now.  Given the improvements in food technology there really should be efficient means to provide nourishment to the entire human population. 

End of Poverty:  Given improvements in healthcare, medical care, nourishment, and the ability to provide basic services and staple goods at a low price, eventually there should be an end to what we call poverty. Sure income inequality will not disappear, but societies will be able to provide a bare minimum living standard which will allow individuals to live at a decent level.  

Power Armor:  This refers to soldiers going into combat with futuristic armor.  Already there are articles about exoskeletons which allow soldiers to carry heavier loads.  As time goes by, armies are becoming smaller, more high tech, and more professional.  Mass conscripted armies give way to smaller leaner fighting forces which are much more elite.  Look at the proliferation of Special Forces activities in the US army.  Political will is becoming less tolerant of human casualties in a world of universal media.  Imagine soldiers similar to Iron Man or Space Marines.  Already there is talk of uniforms which allow soldiers to become invisible.  Imagine soldiers who can go to war completely bulletproof. 

Droid Armies:  The “Drone wars” are already making this a reality.  Drone pilots can fight a war in Afghanistan in the comfort of an office in Nevada.  Politically this has advantages because you don’t need to write a letter to the drone’s mother when one gets shot down and it creates less outrage.  Robots can go into dangerous situations that humans would be hesitant to enter. 

Cashless Society:  With the proliferation of Credit cards, debit cards, online banking, and online shopping, this will be more a reality as time goes by. 

Flexible Careers:  The age of specialization is a fairly recent chapter in human history, probably starting around the time of the industrial revolution and the rise of capitalism.  A few hundred years ago it was common for a well educated gentleman do to everything (hence the term “renaissance man”).  These days, professions are becoming increasingly obsolete because 1) they are being outsourced to lower cost centers or 2) they are being replaced by computer programs or automated.  Factory workers see that their factory moves to Mexico, a lawyer sees that his job can be automated and/or replaced by a paralegal.  A tax accountant sees that more people are using tax software during tax season.  A doctor in India can read a person’s diagnosis and send back a report to a client in the United States, at a fraction of the cost that a US doctor would charge.  A check out clerk at a supermarket is replaced by a machine which allows people to check them out.  People are already changing careers an average of 7 times in their lifetime.  In the future work will be more modular.  Rather than embark on a chosen career path, people will have flexi careers where the emphasis will be adaptability rather than a rigid dogma. 

More Egalitarianism:  The spread of the internet has allowed grass roots movements to organize more effectively.  Look at recent cases of the Occupy movement on Wall Street and the Arab Spring in the Middle East.  Protests have the ability to spread and morph at a rate unprecedented in human history.  People will demand a more equitable spread of wealth.