There are few real surprises in life, and President Trump’s decision to launch a full-scale trade war with China wasn’t one of them. He had virtually promised to do this in his election campaign, as I noted here back in September 2015:
“The economic success of the BabyBoomer-led SuperCycle meant that politics as such took a back seat. People no longer needed to argue over “who got what” as there seemed to be plenty for everyone. But today, those happy days are receding into history – hence the growing arguments over inequality and relative income levels.
“Companies and investors have had little experience of how such debates can impact them in recent decades. They now need to move quickly up the learning curve. Political risk is becoming a major issue, as it was before the 1990s.”
Of course, I received major push-back for this view at the time, just as I did in 2007-8 when warning of a likely US subprime crisis. Most people found it very hard to believe that politics could trump economic logic, as one American commentator wrote in response to my analysis:
“I have a very, very, very difficult time imagining that populist movements could have significant traction in the U.S. Congress in passing legislation that would seriously affect companies and investors”.
But, sadly or not, depending on your political persuasion, my conclusion after the election result was known seems to have stood the test of time:
“You may, or may not, approve of President-elect Trump’s policies. You may, or may not, think that these policies are destined to fail. But they do confirm that the world is moving into a New Normal, which will inevitably create Winners and Losers.
“The Winners are likely to come from those who accept that President Trump will at least try to introduce the policies proposed by Candidate Trump. And the Losers will almost inevitably include those who continue to believe he represents “business as usual”.”
Now, of course, we will start to see these Winners and Losers appear, as there is little the Western central banks can do to counteract the economic cost for the global economy of a US-China trade war.
One sign of this was Uber’s miserable performance on its stock market debut – despite having been priced at the low end of the planned range, it still fell further on its opening, in line with my suggestion last month that Uber’s $91bn IPO marks the top for today’s debt-fuelled stock markets.
But there will be many more serious casualties over the next few months and years:
- NE Asian countries such as Japan and S Korea are part of global supply chains which send a wide range of components to China, where they are incorporated into finished goods for sale to the USA
- Germany and the major European countries have relied on sales to China to boost economic growth, as domestic demand has stagnated, and clearly this support is now going to weaken
- The mining industry and other suppliers of commodities will also be hit – Rio Tinto, for example, depends on China for 45% of its revenue, and on the USA for 15%
- The petrochemicals industry has been dependent on China for its growth since the 2008 financial crisis, as I noted last summer, US-China tariffs could lead to global Polyethylene price war
Back in 2011-12, John Richardson and I wrote ‘Boom, Gloom and the New Normal: How the Western BabyBoomers are Changing Demand Patterns, Again’ to give our view of the likely consequences of the major demographic changes underway in the global economy.
Unfortunately, the politicians of the time took the seemingly easy route out of the crisis. They decided that printing money was so much easier than having a dialogue with the electorate about the implications of ageing populations, or the fact that Western fertility rates have been below replacement levels for the past 45 years. Our warning is now coming true:
“The transition to the New Normal will be a difficult time. The world will be less comfortable and less assured for many millions of Westerners. The wider population will find itself following the model of the ageing boomers, consuming less and saving more. Rather than expecting their assets to grow magically in value every year, they may find themselves struggling to pay-down debt left over from the credit binge.
“Companies will need to refocus their creativity and resources on real needs. This will require a renewed focus on basic research. Industry and public service, rather than finance, will need to become the destination of choice for talented people, if the challenges posed by the megatrends are to be solved. Politicians with real vision will need to explain to voters that they can no longer expect all their wants to be met via endless ‘fixes’ of increased debt.
“We could instead decide to ignore all of this potential unpleasantness.
“But doing nothing is not a solution. It will mean we miss the opportunity to create a new wave of global growth from the megatrends. And we will instead end up with even more uncomfortable outcomes.“
No country in the world now has a top quality pension system. That’s the conclusion from the latest Report by pensions consultants Melbourne Mercer. As the chart above shows:
- Denmark and The Netherlands have fallen out of the top category
- In the G7 wealthy nations: Canada is in category B; Germany and UK in C+; France, US and Italy in C; Japan in D
- In the BRICS emerging economies: Brazil is in category C; India, China and S Africa are D; and Russia’s system is so poor it is unclassified
Unsurprisingly, the cause of the problems is today’s ‘demographic deficit’, as the authors highlight:
“The provision of financial security in retirement is critical for both individuals and societies as most countries are now grappling with the social, economic and financial effects of ageing populations. The major causes of this demographic shift are declining birth rates and increasing longevity. Inevitably these developments are placing financial pressure on current retirement income systems. Indeed, the sustainability of some current systems is under threat.”
These problems have been building for years, as politicians have not wanted to have difficult conversations with voters over raising the retirement age. Instead, they have preferred to ignore the issue, hoping that it will go away.
But, of course, problems that are ignored tend to get worse over time, rather than go away. In the US, public pension funds saw their deficits jump $343bn last year to $3.85tn – making it almost certain that, eventually, pension benefits will have to be cut and taxes raised.
The issue has been that politicians preferred to believe central bank stimulus programmes could solve the deficit by cutting interest rates and printing large amounts of virtually free cash. And unfortunately, when it became clear this policy was failing to work, the banks “doubled down” and pursued negative interest rates rather than admitting defeat:
- Currently, 17% of all bonds (worth $8tn), trade at negative rates
- Swiss bond yields are negative out to 2027, as the Pensions Partners chart shows
- Most major European countries, and Japan, suffer from negative rates
2 years ago, Swiss pension experts suggested that its pension system would be bankrupt within 10 years, due to the requirement to pay retirees an annuity of 6.8% of their total savings each year. This rate is clearly unaffordable with negative interest rates, unless the funds take massive risks with their capital.
The US faces similar problems with Social Security, which is the major source of income for most retirees. The Trustees forecast its reserves will be depleted by 2034, when benefits will need to be cut by around a quarter. Medicare funds for hospital and nursing will be depleted by 2029. And as the Social Security Administration reports:
“173 million workers are covered under Social Security. 46% of the workforce in private industry has no private pension coverage. 39% of workers report that they and/or their spouse have not personally saved any money for retirement.”
Rising life expectancy is a key part of the problem, as the World Economic Forum (WEF) reported in May. Back in 1889, life expectancy was under 50 when Bismarck introduced the world’s first state pension in Germany. Today, the average baby born in the G7 countries can expect to live to be 100. As WEF conclude:
“One obvious implication of living longer is that we are going to have to spend longer working. The expectation that retirement will start early- to mid-60s is likely to be a thing of the past, or a privilege of the very wealthy.”
Sadly, politicians are still in denial, as President Trump’s proposed tax cuts confirm.
Today is not 1986, when President Reagan cut taxes in his October 1986 Tax Reform Act and was rewarded with higher tax revenues. 30 years ago, more and more BabyBoomers were entering the wealth creating 25 – 54 age group, as the chart from the Atlanta Fed confirms:
The issue is the ageing of the Boomers combined with the collapse of fertility rates:
- The oldest Boomers left the Wealth Creator cohort in 2001, and the average Boomer (born in 1955) left in 2010
- The relative number of Wealth Creators is also in decline, as US fertility rates have been below replacement level (2.1 babies/woman) for 45 years since 1970
Inevitably, therefore, Reagan’s demographic dividend has become Trump’s demographic deficit.
As I warned back in May, debt and demographics are set to destroy Trump’s growth dream. And without immigration, the US working age population will fall by 18m by 2035, making a bad situation even worse. Instead of tax cuts, Trump should instead be focused on 3 key priorities to:
- “Design measures to support older Boomers to stay in the workforce
- Reverse the decline that has taken place in corporate funding for pensions
- Tackle looming deficits in Social Security and Medicare”
Future retirees will not thank him for creating yet further debt headwinds by proposing unfunded tax cuts. These might boost GDP in the short-term. But they will certainly make it even more difficult to solve tomorrow’s pension deficits.
A paradigm shift is underway in global petrochemical and polymer markets, as I discuss in a new article for ICIS Chemical Business.
Previously successful business models, based on the supply-driven principle, no longer work. As our new study, “Demand – the New Direction for Profit”, explains, companies now need to adopt demand-led strategies if they want to maintain revenue and profit growth.
The infographic above highlights the key issues:
- During the 1980s/1990s, the BabyBoomers – the largest and wealthiest generation that the world has ever seen – entered the Wealth Creator generation (those aged 25 – 54), when income and spending peak
- They powered an Economic SuperCycle
- The world’s largest economy, the USA, suffered just 18 months of recession in 25 years between 1983 – 2007
- The demand surge created the phenomenon of globalisation, integrating Eastern Europe, then China and India, into the global economy
- It peaked between 1995 – 2000, when all the BabyBoomers (born 1946-70) were in the Wealth Creator generation
But then the oldest Boomers began to join the New Old generation of those aged 55+. In the past, they would have died very quickly – life expectancy, even just a century ago, was only 46 years in the West, and 26 years in emerging economies. But major advances in healthcare, food/water safety, and personal lifestyles meant that the average 65-year old could instead hope to live another 15 – 20 years.
Demand growth began to decline. The New Old already own most of what they need, and their incomes decline as they enter retirement.
Policymakers refused to accept this obvious fact. Instead, they claimed to be able to produce constant growth by boosting financial markets. First they created the subprime bubble in the USA, and then today’s stimulus bubble. This had created $57tn of debt by 2014, nearly the size of the global economy. Clearly, this could not continue:
- China was the first to change economic course, when President Xi Jinping took office in 2013
- The Great Unwinding of policymaker stimulus began in August 2014
China had been responsible for more than half of the stimulus spending under the previous leadership. So its New Normal policies had a major impact on the global credit bubble.
Since then, oil and commodity prices have collapsed, and economies dependent on exports to China have gone into recession. Global GDP fell by a record $3.8tn in 2015 in current dollars. Inflation is turning into deflation.
But still, policymakers in the developed world refuse to accept that demographic changes are driving the global economy. Instead, they are creating even more debt – which can probably never be repaid.
What are companies and investors to do? As the infographic below describes, they have a clear choice ahead:
- They can either hope that somehow these new stimulus policies will succeed despite past failure
- Or, they can join the Winners who are now starting to develop new revenue and profit growth by adopting demand-led strategies
Please click here if you would like to download a copy of the feature article, and click here to download a copy of the Study brochure.
10k Americans have been retiring every day since 2011, and 18k Europeans, as the BabyBoomer generation reaches the age of 65. But pension schemes have not adapted to the fact that average life expectancy is now 20 years at age 65. This is causing major problems for the economy as pensioners leave the workforce – and placing a increasingly large burden on the younger generation who have to fund their pensions for the next 20 years.
The problem is that these changes have happened within just a few generations. It is not all that long ago, relatively speaking, that life for people even in the developed world was “nasty, brutish and short”, as author Thomas Hobbes had written in 1651.
- No government thought to offer pensions even 200 years ago, as most had no regular sources of tax revenue
- Average life expectancy in the West then was just 36 years, and only 24 years everywhere else
- People relied on their children to look after them, if they were lucky enough to live longer than average
- So parents typically had large numbers of children, to ensure some would still be alive to look after them
This situation only began to change when Germany introduced the world’s first state pension in 1889. The UK, then the world’s wealthiest country, followed 20 years later (delaying because it was worried about the cost):
- UK life expectancy was only 50, but pension age was set at 70 to ensure it was affordable
- Only 600k of the UK’s 40m population received the pension, which was worth just £17 ($25) in today’s money)
- But today, only 100 years later, it has become a universal benefit, received by 17% of the entire UK population
When we first began to write ‘Boom, Gloom and the New Normal’, we assumed policymakers fully understood the economic impact of today’s ageing populations. It seemed just common sense – more older people, all spending less, and fewer young people inevitably meant slower growth and probably deflation.
How wrong we were! Even today, most policymakers simply ignore this critical topic. Instead, they continue to believe that creating ‘wealth effects’ in financial and property markets will somehow maintain growth:
- Yet older people already own most of what they need, and their spending drops quite sharply as they move into their 70s and 80s
- Plus, of course, there are relatively few young people in the main wealth-generating 25 – 54 age group, as fertility rates have been below replacement level for the past 45 years
Increasing life expectancy is, of course, great news for us as individuals. But for the economy, it means that yesterday’s ‘demographic dividend’ has turned into a ‘demographic deficit’. Now many pension funds are having to face the fact that they risk not being able to pay out the promised benefits.
As the chart shows from the Wall Street Journal, most US state pension funds are now being forced to reduce their expected annual returns on investment. This means that local and state governments will have to increase their payments – either by raising taxes, or cutting spending. And many analysts worry the assumed returns are still too high – which could mean more funds having to cut actual pension payments as in Detroit.
Private and personal retirement saving faces the same pressures as life expectancy keeps increasing. As a result, the typical US corporate pension fund now has only 78% of what it needs to meet its pension promises. And this, of course, is a vicious circle:
- If companies pay more money into their funds, their earnings will fall, leading to pressure on their stock price
- If they don’t pay more and default on their promises. pensioners will have less money to spend in retirement
Nor is the US alone in this problem. In the UK, 4500 corporate pension schemes are in deficit, compared to only 1750 in surplus. Major telecoms utility BT is in even worse shape, with its £47bn ($72bn) pension fund now 150% of its entire market capitalisation. In Switzerland, pension experts expect the national fund to be bankrupt within 10 years.
There is no easy solution to this problem. But the longer it is ignored, the worse it is going to get.
We seem to be approaching Stage 2 of the Great Unwinding of policymaker stimulus, as the economic implications of demographic change become ever stronger.
The combination of today’s ageing populations with the collapse in fertility rates means it is totally unrealistic to expect growth rates to continue at the SuperCycle levels of the past. They were turbo-charged by the BabyBoomers being in their prime period of income and spending growth – especially as female Boomers entered the workforce in unparalleled numbers.
Yesterday’s New York Times confirmed this common sense fact for the US economy:
“Over the last 40 years, the American economy has grown at an average of 2.8%/year. That’s slower than the 3.7% average from 1948 to 1975, but the future looks even gloomier because that 2.8 figure relied on two favorable trends that are now over: women entering the work force, and baby boomers reaching their prime earning years.
“After 2020, with the percentage of the American population that is of prime working age shrinking, the Congressional Budget Office expects growth to stabilize at 2.2%….(given the) demographic headwinds caused by baby-boom retirements.”
It is also not difficult to look forward, and see where we will be in 5 years time, if we take off our rose-tinted glasses. John Richardson and I did this in chapter 4 of our eBook, Boom, Gloom and the New Normal’. We made 10 forecasts for the world in 2020:
- A major shake-out will have occurred in Western consumer markets.
- Consumers will look for value-for-money and sustainable solutions.
- Young and old will focus on ‘needs’ rather than ‘wants’.
- Housing will no longer be seen as an investment.
- Investors will focus on ‘return of capital’ rather than ‘return on capital’.
- The term ‘middle-class’ when used in emerging economies will be recognised as having no relevance to Western income levels.
- Trade patterns and markets will have become more regional.
- Western countries will have increased the retirement age beyond 65 to reduce unsustainable pension liabilities.
- Taxation will have been increased to tackle the public debt issue.
- Social unrest will have become a more regular part of the landscape.
The transition to the New Normal will be a difficult time. The world will be less comfortable and less assured for many millions of Westerners. The wider population will find itself following the model of the ageing boomers, consuming less and saving more. Rather than expecting their assets to grow magically in value every year, they may find themselves struggling to pay-down debt left over from the credit binge.
Companies therefore need to refocus their creativity and resources on real needs. This will require a renewed focus on basic research. Industry and public service, rather than finance, will need to become the destination of choice for talented people, if the challenges posed by the megatrends are to be solved. Politicians with real vision will need to explain to voters that they can no longer expect all their wants to be met via endless ‘fixes’ of increased debt.
We could instead decide to ignore all of this potential unpleasantness.
But doing nothing is not a solution. It will mean we miss the opportunity to create a new wave of global growth from the megatrends. And we will instead end up with even more uncomfortable outcomes.
Boom, Gloom and the New Normal is available for download in PDF or Kindle format
One of the great myths of our time is that the world’s population is inevitably growing. Almost everyone has heard that the population is certain to reach 9bn by 2050, from today’s 7.3bn.
Yet births in 2013 in the G7 economies (almost half of the global economy) were at the lowest level since the Great Depression year of 1933. And as I noted last year, global fertility rates have halved since 1950 to average just 2.5 babies/woman – and in many countries are already below replacement level of 2.1 babies.
As a result, there is great doubt about whether the population will continue to expand beyond 2030. On current trends, the population will peak within a decade at 8.3bn, and then decline.
Essentially, we have all been fooled by the rise in life expectancy, which is 50% higher today than in 1950.
If people are living longer, then the population must rise, even if fewer babies are being born per woman. But within a decade, today’s ageing BabyBoomers will start dying in large numbers. And then we will suddenly realise there are not enough young people to replace them.
The chart above highlights the issue, based on the UN Population Division’s low scenario for the world’s 10 largest economies (which are almost 2/3rds of the global economy):
- US fertility rates have halved to 1.7 babies/woman since 1950 (black), whilst China has fallen from 6.1 to just 1.1 babies/woman (red)
- Japan, the 3rd largest economy has seen rates fall from 3 babies to 1.1 babies (blue): Germany has fallen from 2.2 babies to 1.2 babies (dark blue)
- France, the 5th largest, has seen them fall from 2.8 babies to 1.6 babies (orange); the UK has fallen from 2.2 babies to 1.5 babies (green)
- Brazil, the 7th largest, has seen them fall from 6.2 babies to 1.3 babies (yellow); Russia has fallen from 2.9 babies to 1.2 babies (black)
- Italy, the 9th largest, has halved from 2.4 babies to 1.2 babies (pink); India has fallen from 5.9 babies to 2 babies (brown)
Of course, if I talk to my friends in the central banks, they tell me that none of this matters. They are confident they can create constant growth with the right mix of tax and stimulus policies. They also believe inflation is due to monetary policy, not supply/demand balances. So if they print more money via Quantitative Easing, they can create inflation.
But after years of this debate, I see no sign that they are right. My argument is simple – only babies can create demand once they have grown up and start earning an income. All central banks can do is create ‘wealth effects’ by boosting asset prices in housing and stock markets.
The argument about monetary policy is thus a fallacy. The vast increase in births during the post-War BabyBoomer period meant demand soared, inevitably creating inflation. Supply simply couldn’t keep up, especially as the economy was transitioning from a war-time basis. You can’t eat tanks, or wash clothes in fighter planes.
The collapse in fertility rates means this pattern is now reversing. Today, we have all the supply built for the Boomer-led SuperCycle. But the lack of babies, combined with the ageing population, means demand is inevitably weakening. Older people already own most of what they need, and their incomes are declining as they enter retirement.
My view is therefore that the central banks are guilty of wishful thinking at our expense. And by creating such high levels of debt, they have actually created even more headwinds for growth. Today’s young people now have to repay all this debt at a time when the arrival of deflation means the cost of debt is actually increasing.