Demographic problems - ageing investors, ageing voters
One other long term problem continues to deserve your attention, demographics. We considered this in detail in January, and here we want to touch on:
- the impact of ageing investors on markets
- the impact of ageing voters on politicians
In research earlier this year (Barclays Capital Equity Gilt Study 2010) they reaffirmed that in the 1980s and 1990s, as the baby boomers of the old industrialised nations reached peak savings, this was a key driver pushing stock markets ahead, to the speculative extreme around 2000.
The research observes that the share of the US population in the high savings bracket of age 35- 54 peaked in 2001. Coincidence? Well a similar peak was seen in the Japanese population in 1990, coinciding with their bubble peak.
One can see this as simple gravitational forces. The increasing flow of savings up to 2000 kept the market riding ever higher, and once the momentum stalled and reversed, so did the stock market.
We are some way into this demographically-driven period of adjustment for stock markets. But for government bonds this hasn’t even begun, and the long term outlook is poor. As populations age and make greater demands on the state, the government must issue more and more bonds, and interest rates must go much higher (double figures?) to attract buyers. That is far from the case now; with looming deflation, interest rates on the better government bonds (such as US and UK) are falling, continuing the trend of 30 years. But we are moving towards the end of this positive trend in the years just ahead.
Turning to the second demographic-linked issue, one of the worrying aspects of the “age of austerity” is the huge scope for policy error as politicians, taxpayers and voters all want their say in significant financial decisions best left to independent bodies (such as the Bank of England). To this end, in Greece they took to the streets, and in Germany they have rattled their sabres in the polling booths.
Politicians and electorates of developed nations had broadly been in harmony for 30 odd years, with governments replaced every so often more through boredom than disgust. An aura of prosperity was created. Consumers took on more debt, a culture of “buy today, pay tomorrow” took a hold; similarly governments took on more debt today, knowing that tomorrow’s growing and increasingly prosperous population could meet the bill. That is until the population stopped growing, and individuals weren’t so prosperous. Suddenly everyone (consumers and governments) wants to now reduce debt.
How will politicians respond to this problem? They should be cutting costs (e.g. benefits and pensions) and increasing taxes. But will they? These figures are for the US, but the implications, shouldn’t be hugely different for the UK. In the last Presidential election just 44% of 18-24 year olds voted. In sharp contrast the percentage of voters soars to 65% for 45- 64 year olds, and over 70% for 65-74 year olds.
Then take into account that over 50% of the US population is now above 45. If politicians want to impress, win votes, get re-elected, are they really going to cut benefits for those in or approaching retirement, the largest part of the voting population?
In the UKs recent Emergency Budget there was a lot of tough talk. But there was some surprise on our part that State pension benefits appeared to be being enhanced, and that the State retirement age hasn’t been moved much closer to age 70. And why do we still have a universal state pension? Does someone still paying higher rate income tax at age 65-70 actually need a state pension? Will Government departments (but for health and international aid) really cut budgets by 25% over the next 4 years?
Watch what the politicians do, not what they say. Greece was a warning if they don’t get a grip.
(Taken from TopFunds Guide July 2010)