The Full English Accompaniment – Watch the population slump, and then the economy

What’s piqued my interest this week?

In the allocations section of my Investment Strategy Statement I mentioned that I favour emerging markets (a generalisation) because of changing demographics. Events of the past few weeks have prompted me to flesh my thought process out. I have a hunch/ theory/ feeling in my waters that long term stock market movements correlate to changing demographics (so far so normal), particularly the ratio of 20-40 year olds to other demographics. This has long been muted, but is difficult to prove, partially (I think) because it depends on where and how you define the demographics and stock market changes, and how you look at dependants (1). It should be noted by the passive investor because if you invest in a national index now you want to be sure that that same index is going to keep going up.

The Japan Problem

Japan is the canary in the coalmine. People have been noting for some time the relationship between Japan’s relatively stagnant growth and its ageing population. This has improved somewhat under Shinzo Abe, averaging around 1% growth over the past decade despite the significant headwind of a falling population. With the highest life expectancy in the world and a fertility rate of 1.4, Japan’s population is getting older, with the expectation the proportion of those >65 will go from 3 in 10 to 4 in 10 in the next 40 years, with the population shrinking by 25% (2, 3). By 2025 it will have an aged dependant per worker ratio of 75% (3).

This is a huge challenge for a social security system, as more people rely on pensions and the healthcare system than the funds that are coming in (4, 5). Public debt increases or the numbers of workers increase, or both.


The problem I see is the EU isn’t that far behind. There’s a big post-boomer bubble coming, made up of those born 1955-75 (6). Shock! Millenial not slating the boomers.

We’re already starting to see one sign of the problem, as companies struggle under the weight of increasing pension debts. It’s one of the things that’s dragged down BHS, Debenhams, HoF, and look at the ongoing saga with private railway company operators. Stagecoach and Virgin don’t want to be on the hook for the Railways Pension Scheme deficit (7). As the working population reduces and the dependant population grows this chasm in the unfunded public sector pension schemes will yawn wider. Executives are looking down the barrel and running for the hills, to mix metaphors. This is across Europe. Germany and Italy have expanding dependant populations, Bulgaria has a birth rate of 1.5 and has seen its population fall by 2 million in 30 years, Poland is closing schools due to the lack of children (8, 9). Some countries though, like Sweden, are bucking the trend through immigration.

The Global Picture

Look wider and there are notes of caution but also reasons to be cheerful. Globally birthrates are falling, the low levels in the developed world balanced by high birthrates in India, the Philippines and Africa (8). Emerging market populations are growing faster than the developed markets are shrinking, so the population will keep growing, but at a slower rate (9). This is good news for the planet, which can’t sustain the current growth rates indefinitely, but bad news for those who dislike immigration, as migration will be required to maintain labour forces in the developed economies with shrinking populations. Or will it?

Before I move on it’s worth focusing on three more countries: India, the US and China (9, 10, 11).

Things are looking peachy for India, which has an expanding population likely to drive greater growth even as it modernises and develops (although this is not without its issues). The US is in better shape than most of the developed world, with forecasts for a relatively flat or increasing population before you even take migration into account (12). This is one of the reasons, combined with global corporate and technological monopolies, that I don’t believe the NYSE is about to undergo a crash when the boomers call time and cash their retirement cheques. But what happened to China? The single child policy. We’re past its peak, and now China is looking at a reduction in its working age population of 212 million by 2050 (10). 212 million less people working. That’s the current population of Brazil. That’s what state top-down planning gets you.

‘Abenomics’ and ways out

So how do we get out of our slump? Well we could open our borders to a motivated migrant workforce, but that would just be too sensible and easy. Some authors look back to Japan for the way out of this population pickle. Shinzo Abe has sustained growth in the face of a falling population primarily through recruiting more people into work who previously were not, alongside technological productivity developments (13). Japan in many ways is a deeply conservative country. The perceived social norm continues to be men go to work all day, women are home-makers. In 2013 Abe introduced ‘Womenomics’ (there’s a theme here), increasing female participation in the labour force through a number of methods (13, 14). I don’t feel this would necessarily translate to western European cultures, where women working is the norm. I think efforts in our economy to bring those out of the labour market for whatever reason into work, like zero-hours contracts, have been less successful. There’s more people in work, but productivity and earnings aren’t necessarily increasing.

Technology and automation, on the other hand, probably are solutions. Automation enables greater output with fewer workers, and can be applied to manufacturing, construction and some service industries, as it has in Japan (14). It’s not good news for the factory workers and low-skilled employees, which is all the more reason for Universal Basic Income – an argument for another time. There will continue to be some jobs robots will struggle with; caring roles or where intuition is required. As a shrink I’m probably safe. Robots are yet to understand human emotions.

Major caveats

Important flaws in this whole essay:

The stock market isn’t necessarily correlated with population demographics.

There’s lots of arguments and evidence of this. It can basically be boiled down to:

  1. You can’t correlate specific bear markets, like the dotcom bubble, to demographic/ population change points – this is often identification error
  2. External factors and drivers such as politics (e.g. the fall of the Berlin Wall/ communism etc) have unpredictable effects on a) markets and b) demographics
  3. The timescales and effect sizes are such that the end result on the stock market appears negligible (15, 16).

Add in the fact that we have an increasingly interconnected world, with global corporations taking earnings from multi-national operations, and it all gets murky. I don’t think any developed market is about to crash while companies listed on it’s market utilise cheap developing world labour (17). Just also don’t ignore a developing market with increasing capitalisation (18). Which is why I aim to hold more in certain developing markets. But you, as usual, should do your own research.

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading (affiliate links):

The Right Way to Keep Chickens – Virginia Shirt – Another guide to our new pets.

Food Of The Gods: The Search for the Original Tree of Knowledge: A Radical History of Plants, Drugs and Human Evolution – Terence McKenna – An ethnobotanist explores humanitys’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.



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