US tax cuts will fail as Trump’s demographic deficit replaces Reagan’s demographic dividend

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.

G7 Summit shows leaders are forgetting the lesson of the 1930s

G7 May17G7 Summits began in the crisis years of the mid-1970s, bringing Western leaders together to tackle the big issues of the day – oil price crises, the Cold War with the Soviet Union and many others.  Then, as stability returned in the 1980s with the BabyBoomer-led economic SuperCycle, they became forward-looking.  The agenda moved to boosting trade and globalisation, supporting the rise of China and India, and the IT revolution.

This weekend’s 43rd Summit in Italy suggested we may be going back to earlier days.  As the picture confirms, the leaders did all meet in the Italian city of Taormina in Sicily.  But they clearly found it difficult to meet the challenge set by their hosts of “Building the Foundations of Renewed Trust”.  One very worrying sign was that both the USA and the UK seem to have become semi-detached from the process. :

□  UK premier Theresa May left early, to “hold urgent talks with her election campaign chiefs” after new polls showed her lead dropping to single figure levels
□  President Trump refused to endorse the Paris Agreement, causing German Chancellor, Angela Merkel, to comment:
“The entire discussion about climate was very difficult, if not to say very dissatisfying. There are no indications whether the United States will stay in the Paris Agreement or not.”

There was some good news, with a compromise seemingly being agreed with US President Trump over his desire to dismantle the world’s open trading system, as the final statement noted:

“We reiterate our commitment to keep our markets open and to fight protectionism, while standing firm against all unfair trade practices. At the same time, we acknowledge trade has not always worked to the benefit of everyone.”

But it was a relatively weak statement, and nothing was said about the President’s withdrawal from the Trans-Pacific Partnership, or his decision to demand a formal review of the North American Free Trade Agreement. The change is even clearer by contrast with last year’s Summit in Japan, when the leaders committed:

To fight all forms of protectionism ….(and) encourage trade liberalization efforts through regional trade agreements including the Trans-Pacific Partnership, the Japan-EU Economic Partnership Agreement, the Transatlantic Trade and Investment Partnership and the Comprehensive Economic and Trade Agreement.”

Sadly, the same lack of unity had been seen just before the Summit, when President Trump failed to endorse Article 5 (the fundamental principle of the NATO Alliance), which declares that an attack on one member state is an attack on all, and requires a mutual response.  As the Financial Times noted:

This was particularly galling given that he was attending a memorial for the September 11 terror attacks — the only time Article 5 has been triggered. It remains unclear why he equivocated.”

Even the Summit dinner saw a lack of unity, with US National Economic Council director Gary Cohn suggesting:

There was a lot of what I would call pushing and prodding.”

This lack of a common purpose amongst Western leaders is deeply worrying.  Of course, they were able to agree on strong words about terrorism and the role of social media.  But their key role is to be pro-active, not reactive.

Collectively, their countries are responsible for nearly two-thirds of the global economy.  Individually, none of them – not even the USA – can hope to successfully tackle today’s challenges.  This was the rationale for the formation of the G7 in 1975, and it has since played a critical role in helping to spread peace and prosperity around the world.

Today’s G7 leaders seem to be in danger of forgetting their core purpose.  They need to re-open their history books and focus on the lesson of the 1930′s, when “beggar-my neighbour” trade policies led directly to World War II.


Lack of affordability limits gasoline demand growth

Gasoline Jul16

How much of your day’s wage does it cost you to buy a US gallon of gasoline?  This chart from Bloomberg shows the answer for 61 countries, based on prices for 95 octane grade at the end of Q2:

  Bankrupt Venezuela is most affordable at 1% of a day’s income (based on GDP/capita)
  Kuwait (1%), and the USA, Luxembourg and Saudi Arabia at 2%, are the other most affordable Top 5 countries
  In the rest of the G7 countries, Canada is 9th at 3%; Japan is 14th at 4%; whilst Germany (17th), the UK (22nd) and France (23rd) are at 5%; and Italy at 7.5% is 29th
  In the BRICs,  Russia is 33rd at 9%; Brazil is 49th at 16%; China 50th at 17%; and India 61st at 80% (not a typo)

These are fascinating results as they explain why today’s lower oil prices have not led to a major increase in gasoline consumption.  Instead, they confirm that demand patterns in today’s New Normal world are driven by Affordability, not absolute price.

Gasoline Jul16aAffordability, of course, depends on more than just the absolute price.  Helpfully, Bloomberg also sort the data in terms of average annual gasoline cost (based on the amount of gasoline used per year in 2013, as a percentage of salary), as shown in the second chart:

  Venezuela is still most affordable at 0.3%, even though the average driver uses 120 gals/year
  China. Hong Kong, Turkey and Belgium make up the Top 5 at 0.5% of average annual salary – using 10 gals, 28 gals, 9 gals and 38 gals respectively
  In the G7, France is 6th at 0.5% using 36 gals;  Italy (18th), Germany (19th) and the UK (22nd) are all at 1% using 48 gals, 79 gals and 74 gals respectively;  Japan is 34th at 1.3% using 114 gals; USA is 47th at 1.9% using 420 gals; and Canada is 58th at 2.7% using 327 gals
 In the other BRIC countries, Brazil is 56th at 2.5% using 54 gals; Russia is 52nd at 2% using 88 gals and India is 20th at 1% using 5 gals

2 key conclusions can be drawn from this data.

The first is that analyses suggesting that Country A has enormous potential to double gasoline consumption by comparison with Country B are missing the point. If the cost of a gallon of gasoline in India is 80% of the average daily wage, it is no surprise that the average Indian only uses 5 gallons/year.  Unless wages rise dramatically – which would require major policy changes over decades – the country is going to remain near the bottom of the table.

Secondly, one also needs to look at the relative affordability of gasoline in terms of annual spend.  As President Obama noted in April:

The reality for the average American family is that its household income is $4,000 less than it was when Bill Clinton left office.

Essentially, therefore, the average American is already having to prioritise their discretionary spending.  And so whilst they might, or might not, like to drive more miles – the decision to do this won’t just be based on the cost of gasoline, even if the incremental cost of a single gallon is only 2% of daily income.

The gasoline data thus confirms that companies cannot rely on economic growth to drive revenue and profit growth, now that the Boomer-led SuperCycle has ended.  The Winners in this New Normal world will be those who can best meet people’s basic needs – for food, water, shelter, health and mobility – in the most sustainable way.

In turn, this suggests that companies need to adopt new service-led business models. These models will no longer simply be based on the value of the product, but will also include the global value provided by the product.

Stimulus proves no solution for today’s economic slowdown

G20 debt“Central banks have to be mindful that too long a period of very low interest rates can have undesirable consequences in the context of ageing societies. For pensioners, and those saving ahead of retirement, low interest rates may not be an inducement to bring consumption forward. They may on the contrary be an inducement to save more, to compensate for a slower rate of accumulation of pension assets.”  Mario Draghi, President, European Central Bank

It is now exactly 4 years since we published Chapter 1 of Boom, Gloom and the New Normal: How the Western BabyBoomers are Changing Demand Patterns, Again.  When writing it, John Richardson and I thought our basic premise – that demographics drive demand – was simply a statement of the obvious.  We didn’t write the book to make this argument.  We wrote it with the aim of helping companies and investors to develop the new business models needed to profit from these new demand patterns.

How wrong we were!  Very few policymakers took us seriously, with the exception of Governor Shirakawa of the Bank of Japan.  He had already made the same argument when taking office in December 2008.

Instead, they maintained that the stimulus provided by Quantitative Easing (QE) was already returning the global economy to “normal” levels of economic growth.  And when, as was inevitable, this first round of QE failed, the US Federal Reserve simply did QE2 and then QE3, whilst China and the UK followed.  Even worse, new premier Abe replaced Shirakawa in 2012 as a prelude to QE in Japan, and Mario Draghi followed at the ECB this year.

But of course, there has been no sustained recovery.  And finally, on Friday, Draghi half-conceded that there just might be some downside to the policy in a world of ageing societies.  His statement above thus stands as the first faint recognition by a Western policymaker of the fact that stimulus has been exactly the wrong policy since 2008.

Unfortunately, however, this recognition on its own is “too little, too late”.  The Great Unwinding of these stimulus policies began 9 months ago, and we are already seeing rising volatility in the 4 key markets of oil, the US$, interest rates and stock markets.  These are the warning tremors of the debt-fueled Ring of Fire created by the central banks.

China, the world’s 2nd largest economy, has been moving away from QE since the new leadership took office in 2013, due to the dangers that it creates.  As premier Li warned last month:

It is quite easy for one to introduce QE policy, as it is little more than printing money.  When QE is in place, there may be all sorts of players managing to stay afloat in this big ocean. Yet it is difficult to predict now what may come out of it when QE is withdrawn.”

The chart highlights the problem, based on Bloomberg data.  It shows that the G7 group of the world’s major economies can now be best described as the Ageing and High Debt group.  Their gross government debt per person ranges from a minimum of $36k/person in Germany to $100k/person in Japan.  It is hard to believe all this debt will be repaid.  As I noted in February, after the Greek election:

We all learnt one crucial lesson from Syriza’s victory in the Greek election last week – voters can halt the European Central Bank (ECB).  Or in other words, protest coalitions can trump elite consensus.  In places like Spain and France, this effect may not work through immediately, but it is being absorbed.”

Draghi has realised very late that the economic rules change in an ageing society.  Older people already own most of what they need, and their incomes decline as they near retirement.  They also have to save more.  None of them ever expected that average life expectancy at age 65 would double during their lifetime, from 10 to 20 years.

There are only 3 ways that the debt burden can be resolved – by major rises in taxation, cuts in services, or default.  Greece has shown that electorates will not support the first two options forever. The recent tremors in government bond markets are thus a first sign that investors are realising the 3rd option may eventually prove inevitable.


My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Benzene Europe, down 45%. “Prices have moved lower this week with excess product in Asia and the US said to be the key causes”
Brent crude oil, down 37%
Naphtha Europe, down 34%. “The naphtha arbitrage window from Europe to Asia is only marginally open but is described by traders as the best money-making option this week”
PTA China, down 27%. “Domestic prices were largely on a downtrend, attributed mainly by weaker downstream polyester conditions.”
HDPE US export, down 18%. “Domestic export prices remained stable during the week, though there were reports of increased trading”
¥:$, down 18%
S&P 500 stock market index, up 9%

G7 births in 2013 equal Great Depression year of 1933

G7 Dec14In 2013, there were fewer births in the G7 countries – responsible for nearly 50% of the global economy – than in any year since the Great Depression year of 1933.*

As the chart also shows, 1933 was an exception.  Births bounced back immediately afterwards.  But the low figure in 2013 is part of the declining trend seen since the end of the 1946 – 1970 G7 BabyBoom (yellow highlight).  It is almost certain that 2014 or 2015 will see an all-time low being reached.

This has major implications for the global economy, as common sense tells us that future economic growth depends on the number of babies being born.  There would be no global economy if there were no people on the planet.

Overall, G7 births have fallen by nearly a quarter since their 10.6 million/year peak to today’s 8.1m/year:

  • US births have fallen 3%, despite major Hispanic and other immigration (dark blue)
  • Japanese births have fallen 29% (red) and UK births by 17% (green)
  • German births have fallen 33% (orange) and Italian births have fallen 34% (purple)
  • French births have fallen 8% (light blue) and Canadian births 12% (brown)

And of course, the same downward trend is underway in most countries outside the G7.

In China, for example, the number of babies in the 0 – 4 age group has collapsed by 30% from 131m in 1970 to just 85m today.  Its fertility rate is just 1.4 babies/woman, leading China’s Academy of Social Sciences to warn History shows that no country that slips into this trap returns to the replacement level.”

Overall, only the very poorest countries are still seeing an increase. India for example, with GDP/capita of just $1500, is typical of those countries where births are still increasing.

The reason for this alarming outlook is simple, as the German statistical office explains:

“The number of births is highly dependent on the number of women aged between 26 and 35, as they have the highest fertility rates.  As, however, the number of potential mothers between 26 and 35 years has decreased substantially, the number of births has fallen.”  And they add a further note of caution, pointing out that “the number of births will only remain stable in the long term if fertility increases“.

Recent data also shows few signs of fertility rates increasing at the moment, as I discussed in OctoberContrary to popular belief, the world is probably already below the 2.1 babies/woman level that represents replacement level.  Thus it is most unlikely that the global population will ever reach the widely expected 9bn level in 2050. 

In turn, as we argued in Boom, Gloom and the New Normal, this means global economic growth will never return to the Boomer-led SuperCycle level in our lifetimes.

* Birth records for the full G7 begin in 1921, as shown in the chart 

Unilever says Q2 market growth slows in emerging countries, developed countries weak

The global economy really isn’t getting any better.  That’s the key conclusion from the blog’s quarterly survey of company results for Q2.

flat arrowOf course, some companies are doing well – either because of shale gas economics, or their own market positioning.  But consumer giant Unilever summarised the general picture very well:

Market growth continued to slow in emerging countries, particularly in Asia, as macro-economic pressures weighed on consumer spending in our categories. Developed markets remained weak with little sign of any recovery in North America or Europe“.

Its global rival Nestle described a similar picture, with its successes being achieved despite headwinds in most of its major markets.

Of course, each quarter we are assured by policymakers that recovery is now certain.  But every quarter we are disappointed.  This month, even the new deputy chairman of the US Federal Reserve, Stanley Fischer has admitted that:

Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back”

And in the past few weeks it has become clear that some major investors, as well as leading central bankers, are starting to take a serious interest in the blog’s Demographic Scenario.

The benefit of this Scenario is that it explains the economic developments of the past 50 years in a simple and common-sense fashion.  It does not require us to believe that central bankers have somehow become ‘Masters of the Universe’, able to change people’s entire behaviour via the simple manipulation of monetary policy.

As a result, the blog is now making a ‘Speed Read’ available of the background to the Scenario’s central arguments.  It collects together the 2 page summaries from ICB that accompanied the monthly publication of each chapter of  ‘Boom, Gloom and the New Normal’, written by the blog and co-author John Richardson.

Please click here to download the ‘Speed Read’ (no registration required).

The blog is also now offering a new strategy workshop to help your business realign itself with the profitable growth areas of this New Normal.


Air Liquide. “New contracts in growing markets”
Air Products. “Strong sales for its electronics and performance materials and higher pricing for its merchant gases”
Akzo Nobel.  ”Long-running cost and efficiency programme starts to bear fruit”
Arkema. “All divisions registered lower sales and EBITDA margins in Q2″
Ashland. “Global restructuring programme and a $12m charge because of a pension adjustment”
Axiall. “Dramatically lower profits and somewhat lower sales”
BASF. “Expects the global economy to post a weaker growth than previously expected this year”
BP. “In the petrochemicals business, the challenging environment is expected to continue”
Bayer. “Higher volumes, lower raw material prices and our efficiency improvements”
Borealis. “Stronger margins from polyolefins offset weaker-than-expected results in fertilizers”
Braskem. “Spreads of thermoplastic resins and key basic petrochemicals fell in Q2″
Brenntag. “Modest signs of recovery in Europe/NAFTA and ongoing challenges in LatAm and Asia”
Celanese. “Sales rose as well as equity in the net earnings of affiliates”
CP Chem. “Higher realised olefins and polyolefins chain margins”
Clariant. “Volatile and challenging business environment compared to the previous year”
Croda. “Weak consumer demand in Europe impacted the business, particularly in personal care”
Dow. “Ongoing slow growth and volatility in the global marketplace”
DSM. “Weaker performance of polymer intermediates, particularly caprolactam”
DuPont. “Drive greater growth and value with a simplified, streamlined support structure and a smaller cost base”
Eastman. “Net sales were $2.46bn, up less than 1%”
Evonik. “Pricing pressure continued to weigh on profits”
ExxonMobil. “Margins were flat as improved commodities were offset by weaker specialties”
Huntsman. “Improved pricing and stronger demand for key products”
INEOS. “US cracker business environment was strong with top of cycle margins and high operating rates”
Indorama. “Most producers operating at below cost over last two years”
K&S. “Given the starting position on global potash markets, we had a solid first half of the year”
Kemira. “Currency headwinds and divestments”
LG Chem. “Overall performance has decreased due to stronger Won and slow recovery of sluggish industry”
Lanxess. “Continuing low earnings level and increasing competition show the need for further action”
Lonza. “Implementation of growth projects and restructuring”
LyondellBasell. “Jump in profit was driven primarily by the American olefins and polymers business”
MOL. ““The main driver was an adverse external environment”
Methanex. “Industry environment remains favourable, with steady demand and limited new supply additions expected”
Nova.  Lower margins in its olefins operations in Joffre, Alberta, and Corunna, Ontario”
Novozymes. “Positive sales impact from its partnership with US agrochem giant Monsanto”
Nestle.  “N America trading environment remained subdued.  Latin America was helped by pricing, reflecting inflationary pressures…Europe a deflationary environment where consumer confidence remains fragile…China was challenged, but we see fundamentals improving”
OMV. “Performance was lower than the preceding three-month period, primarily because of a decrease in ethylene spreads”
Olin.  “Lower volumes and lower prices meant that netbacks declined about 11%
PKN Orlen. “Petrochemical model margin was recorded at €741/t in Q2 against €729/t in 2013
PPG. “Volume growth and improved year-over-year earnings in all major regions”
PTT. “Significant decrease in paraxylene price pressured by supply surplus”
Petronas. “Heavy plant turnarounds and planned maintenance activities during the period”
PolyOne. “Specialty now contributing two-thirds of our segment income”
Petro Rabigh. “Higher prices and sales volumes of its petrochemical products”
Praxair. “Sales growth was driven by new projects in North America and Asia, as well as disciplined price execution”
Reliance. “9.3% year-on-year increase in revenue”
SABIC. “Higher output and sales volumes”
SCG. “Chemicals division posted Q2 profit down 14% year on year, despite a 24% jump in sales”
Shell. “Improved base chemicals industry conditions mainly in North America”
Solvay. “Transformation is delivering on all fronts”
Synthomer. ““Strong competition between glove manufacturers has caused ongoing margin pressure”
TVK. “Improved operational efficiency, favourable currency effects, and lower energy costs”
Tasnee. “Improved margins at its petrochemicals unit, and higher sales volumes”
TOTAL. “Petrochemical margins remained high in the US but retreated in Europe and Asia”
Trinseo. “Lower costs in styrene and butadiene”
Tronox. “Sales volumes increased across multiple products and geographic regions”
Unilever. “Market growth continued to slow in emerging countries, particularly in Asia, as macro-economic pressures weighed on consumer spending in our categories. Developed markets remained weak with little sign of any recovery in North America or Europe”
Versalis. “Increased oil-based feedstock costs, continued weakness in commodity demand, which reflected slow economic growth and increasing competition from Asian producers”
Vopak. “Lower revenues and higher depreciation costs”
Wacker. ““Rising volumes, better prices for polysilicon and good coverage of fixed costs”
Westlake. “Benefit from low-cost ethane-based ethylene production”