Global stock markets still depend on low-cost money for support

stocks Sept14The blog’s 6-monthly review of global stock markets highlights the narrow nature of the advance since September 2008, when the blog first began analysing developments.  It shows their performance since the pre-Crisis peak for each market, and the performance of the US 30-year Treasury bond.

Remarkably, only the US, India, Germany and the UK stock markets are in positive territory, along with the 30-year bond.  Japan, Brazil, Russia and China remain well below their previous peaks:

  • The 30-year bond remains the best performer, as investors fear that a sustained economic recovery remains as far away as ever (purple line)
  • The US had been the best stock market performer till now, driven by the US Federal Reserve’s belief that a strong stock market would spur economic recovery (green)
  • India has now become the best performer, due to hopes for broad economic reform from the new Modi government (black)
  • Germany is next, supported by hopes the European Central Bank will continue to follow the Fed’s low-cost money approach (orange)
  • The UK has just slipped into positive territory, also supported by Bank of England stimulus (pink)

A number of major markets remain in negative territory:

  • Japan strengthened in 2012 as the Abe government followed the Fed’s policy, but has recently seen a slowdown as GDP fell in Q2 (blue)
  • Brazil had weakened, despite the World Cup and 2016 Olympics stimulus, but recent polls lead investors to hope for a change of government next month (brown)
  • Russia’s recovery also ended rather early, despite the boost from high oil and commodity prices, and Ukraine developments have caused it to move sideways (red)
  • China’s market has never seen a recovery, as investors have preferred to speculate in the housing bubble, where prices have been doubling every 2 – 3 years (blue)

All-in-all it is hard with the benefit of hindsight to argue with September 2008′s conclusion, as the storm began to break:

This pattern seems to confirm the blog’s long-standing concern that we may now be facing a multi-year global slowdown, as the financial excesses of the 2003-7 boom are unwound.”

Those markets where there has been little direct central bank stimulus have found it very hard to recover.  This is quite contrary to the pre-2008 experience, when ‘a rising tide lifted all ships’.

The blog will look in more detail at the US equity market next week, as it concludes its mini-series on the Great Unwinding of stimulus policy now underway.

“Unparalleled seismic demographic shifts now underway” in UK

Euro consumers2What happens to demand when women stop having lots of babies, and the general population starts living very much longer?

Common sense would suggest economic growth would go through 2 quite remarkable changes:

  • Phase 1.  Growth would accelerate, as the population became concentrated in the wealth creating 25 – 54 age group, and the need to spend money on dependent children reduced
  • Growth would then move into SuperCycle mode as large numbers of women became able to re-enter the workforce after childbirth, and could demand major increases in their earnings relative to men
  • Phase 2.  Growth would steadily slow, as the number of wealth creators would begin to steadily reduce, with more and more men and women joining the New Old 55+ group
  • This Phase would also see massive change in demand patterns, as the New Old represent a replacement economy.  They bought most of their major items (housing, cars, furniture etc) when younger, and their incomes reduce as they enter retirement

Of course, this is not just a theoretical exercise.  It is instead, as we describe in Boom, Gloom and the New Normal, exactly today’s situation.  And the transition from Phase 1 to Phase 2 is well underway, having begun in 2001 when the first BabyBoomers (born globally between 1946 – 1970) entered the New Old generation.  The Boomers are the largest generation in history, and the average Boomer (born 1958) joined the New Old last year.

Small wonder therefore that a new report from the UK’s leading consumer credit agency, Experian, suggests “The UK is undergoing unparalleled seismic demographic shifts”.  And, of course, this scenario is not just confined to the UK.  All Western nations, and many of the main emerging countries, are experiencing the same seismic shifts.  This is truly a global earthquake: profound and long-lasting changes are inevitable as it takes place.

Another sign of these changes comes from EuroMonitor consumer research, captured in the chart above.  As they discovered, consumers no longer define themselves by the size of their car, house or kitchen:

  • Instead, their focus is value for money, less complex lifestyles
  • They value family and friends, and small moments of indulgence
  • Trust and carbon footprint are important to them
  • And they want less hassle and more convenience in their daily lives

Change is always difficult within a corporate structure.  But all the evidence suggests that companies who fail to reposition themselves for this New Normal are at risk of being swept away by the earthquake now underway.

UK tinkers with higher pension ages, ignores impact on GDP

UK Feb14Many readers have asked to see how the UK economy is being impacted by its ageing population, following the blog’s December series on the US, China, Japan, Germany and France.  As the chart shows, it is in a very similar position to all of these countries:

  • Life expectancy has increased by 17% to 81 years today, from 69 in 1950 (red column)
  • Fertility rates have almost halved to 1.5 babies/woman today from 2.8 in 1960

This increase in life expectancy is, of course, a major achievement.  It is easy to forget that Western life expectancy was just 36 years in 1820, less than 200 years ago (and in the rest of the world it was only 24, the same as in the year 1000).  Almost overnight, in historical terms, people then began to live for longer.

The UK, as the world’s leading economic power, was at the forefront of this change, closely followed by the other W European nations and the USA.  Increased life expectancy boosted economic growth, as described by the great economic historian Angus Maddison in his authoritative ‘The World Economy: A Millennial Perspective.’

In turn, as we noted in chapter 1 of Boom, Gloom and the New Normal, the UK became the second country in the world to introduce a state pension in 1908.  Even then, however, life expectancy was only 50, whilst pension age was set at 70.  And only those earning less than 12 shillings/week (£40, $65, €45 in today’s money) were eligible.

The UK thus followed Germany’s lead in 1889, which had also set pension age at 20 years above life expectancy.  Only 600k of the UK’s 40m population were eligible for the pension, which was worth just 5 shillings.  Today, by comparison, the state pension has become a universal benefit, received by 17% of the UK’s 63m population.

The problem is that our thinking about pensions and retirement age has not kept pace with developments in life expectancy.  And it has been left well behind by the collapse in fertility rates.  The number of those entering their wealth creating period between the ages of 25 – 54 years is 17% lower than in the 1946-70 BabyBoom.

The result has been to effectively create a ‘sandwich generation’, where today’s Wealth Creators will increasingly have to support their parents financially as well as their own children.  And unlike their parents, they also have to pay record prices for their homes and repay college tuition loans.

It is thus not surprising that economic growth has remained very slow since the credit bubble ended in 2008.  Governments have tried to revive the bubble, in the belief that ever-higher house prices will ensure their re-election.  But in reality, they are simply adding to the debt burden.

As in other countries, there is little awareness of the likely economic impact of these developments.   Yet as the new OECD Pension Handbook highlights, 29% of the working age population are already over 65 years.  And politicians have chosen to only make minor adjustments to pension age:

  • Women’s pension age is increasing from 60 to 65 by 2017
  • Both men and women’s pension age will then increase to 66 by 2020 with further minor increases by 2046
  • At this point, the pension age of 68 will still be below that of 1909, whilst life expectancy may well be close to 100

As elsewhere in Europe, detailed pension arrangements are too complex for a blog post, but the key facts are:

  • Average earnings are $36k per worker
  • The basic state pension is estimated to be worth 16% of average earnings for a single person
  • There are other benefits and credits including winter fuel allowances and free travel passes
  • Plus all UK citizens are entitled to free healthcare

Overall the OECD calculate that gross pensions are worth 31% of median earnings.  In addition, many people will receive a small private pension from their employer and/or personal savings.  But the average ‘pension pot’ is only £30k, providing a pension of just £1200/year.

This might not have mattered too much from an economic viewpoint if people still died close to pension age.  After all, less than 1 in 3 adults were in the New Old 55+ generation as recently as 1950.  But the ageing of the BabyBoomers means there will nearly 1 in 2 adults (43%) in this cohort by 2030.

This will inevitably result in a major decline in spending power, as more and more Boomers move into retirement.  And as household spending is 60% of UK GDP, the economy will almost inevitably see low growth and deflation as a result – making the debt burden even harder to repay.

Yet as in the other countries covered in this series, there is very little discussion of the likely impact of this development on the wider economy.  Instead policymakers prefer to focus on important but relatively minor issues such as the impact on social security and healthcare costs.

But one day, the electorate is going to wake up to what is happening.  And it is unlikely to be happy when it does.

UK economy grew 330% since 1948 Olympics

UK GDP Jul12.pngTomorrow sees the opening of the 3rd London Olympic Games. As promised, the blog today looks at the change in GDP per capita in the UK economy since the 2nd London Games in 1948

GDP per capita is the best measure of a country’s standard of living. It shows how the economy has grown, in terms of the number of people in the population. As the chart shows, the UK has done very well over this extended period of time:

• In terms of money of the day (red line), GDP/capita has grown from £239 in 1948 to £24168 last year
• Adjusting for inflation (green line), it has grown 338%. The UK thus ranks 22nd in the world

This confirms that western countries still enjoy much higher standards of living than anywhere in the emerging economies, thanks to the arrival of the BabyBoomer generation. China, for example, is in 88th place with just 14% of the UK’s GDP/capita.

Of course, nothing lasts forever. The green line also highlights how the UK’s GDP/capita has begun to slip in recent years. Policymakers have failed to recognise the importance of demographics, and have ignored the potential impact of the ageing of the Boomers on the economy. But that is tomorrow’s problem.

Today, the blog is preparing to cheer on the athletes who have gathered from all over the world. And it will be cheering especially for Beth Tweddle, daughter of its former ICI colleague Jerry Tweddle, in the gymnastics. A gold medal to accompany her world championships would be a marvellous achievement.