In yesterday’s Financial Times, John Authers wrote an interesting piece in which he summarizes comments made by Barclays analyst Tim Bond on the role that demographics play in the stock market: “Long view: How baby boomers lead bear market by the nose”

Bond rightly points out that equities became a savings vehicle for the masses in the 1950s and that this trend increased sharply in the early 1980s as the Baby Boomers entered early middle age.  And then the string of bubbles started.  Authers writes,

Mr Bond suggests, extremely plausibly, that this can chiefly be attributed to demographics. As the baby boomers aged, and the long bull market made them more confident, so they “over-invested” in assets around the world… [T]he size of the pool of capital available to pour into Asian stock markets, or into internet stocks, was disproportionate to the availability of investment opportunities. It was in nobody’s interests to tell the boomers this, as the investment industry is paid according to the amount of assets it manages.

Looked at in the longer term, Barclays compared cyclical price/earnings ratios on stocks since 1950 with the ratio of 35-54 year-olds in the population. As the chart shows [in the print edition], the fit is excellent. Stock valuations became most extended just as the cohort of baby boomers were saving and producing most.

Authers provides a chart in the print edition (not available online) that strongly resembles the HS Dent Spending Wave.  And like the Spending Wave,

The implications for the future are discomfiting. The proportion of 35-54 year-olds in the population will keep declining for another decade, while the imminent growth in the retired population should be very sharp.  That means equity valuations should keep coming down. The demographic shift that drove an equity bull market for two decades can be expected to drive a bear market for another two decades. That implies that this bear market has another decade to run.

Authers and Bond manage to reach the same basic conclusions as HS Dent, though we do differ with their way of getting there.   HS Dent has NEVER suggested that Baby Boomer investors were what drove the stock market boom of the past 20 years.  The reason for this is simple: while many Boomers do have 401k plans and other investment vehicles, most have very low balances.  Most financial assets are concentrated in the hands of a relatively small slice of America’s wealthy.  Bill Gates, for example, will not be liquidating his 401k plan to fund his retirement.  And neither will the moderate rich, those Americans with portfolios in the $2-$10 million range.

It is the Dent view that the Baby Boomers influence the market with their spending.  Boomer spending drives corporate profits, which in turn drives the market over a prolonged period.  When the Boomers cut back, companies lose their pricing power — and their profitability!

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

“More prosperous shoppers seem to be defying continuing high unemployment levels and economic uncertainty to renew their spending on luxuries such as jewelry, fashion and cosmetics,” we read in the Financial Times this morning.   This would seem to be consistent with the long chain of positive earnings releases thus far in 2010.  Just last week LVMH, owner of the Louis Vuitton brand among others. reported that demand for its high-end products accelerated towards the end of 2009.

So what gives?  Isn’t this supposed to be a “rich man’s recession?”  There are a couple of important points to be made here.

Yes, this is a rich man’s recession. It is an asset-based recession marked by deleveraging.  A crisis that sees virtually all non-Treasury assets fall in value is going to take a bigger bite out of the net worth of the “asset rich” than of the average Joe who works for a paycheck.  When the financial world imploded in 2008, consumption of luxury goods ground to a virtual halt.  Retailers were stuck with a mountain of inventory that they couldn’t sell without deep discounting — a cardinal sin for a purveyor of luxury goods!

But once the shock of the crisis wore off, wealthier shoppers returned to their old haunts.  How do we explain all of this? Read the rest of this entry »

 We like “big picture” analysis here at HS Dent.  It’s very easy to get wrapped up in the noise of economic press releases and stock market prognostications and lose sight of the major themes that will shape the world in the decades ahead—and no theme is more important than demographic trends.

We were delighted to see Jack Goldstone write an article on demographics in the latest issue of Foreign Affairs: “The New Population Bomb” (Registration may be required to view entire article)

Goldstone outlines the major demographic shifts afoot–the aging of the developed world, the urbanization of the emerging market countries, and the relative shifts in population and economic clout between developed and developing world.  All of these are themes that HS Dent follows. Goldstone also arrives at many of the same conclusions as HS Dent.  The effects of these demographic changes will, Goldstone writes, “have a dramatic impact on economic growth, health care, and military strength in the developed world. The forces that fueled economic growth in industrialized countries during the second half of the twentieth century — increased productivity due to better education, the movement of women into the labor force, and innovations in technology — will all likely weaken in the coming decades.”

Goldstone continues,

College enrollment boomed after World War II, a trend that is not likely to recur in the twenty-first century; the extensive movement of women into the labor force also was a one-time social change; and the technological change of the time resulted from innovators who created new products and leading-edge consumers who were willing to try them out — two groups that are thinning out as the industrialized world’s population ages [This is consistent with HS Dent’s research into S-curves and market penetration - CLS]

Alas, there is more bad news:

Moreover, developed countries will be lucky to keep productivity growth at even that level; in many developed countries, productivity is more likely to decline as the population ages…. All this means that just as aging developed countries will have proportionally fewer workers, innovators, and consumerist young households, a large portion of those countries’ remaining economic growth will have to be diverted to pay for the medical bills and pensions of their growing elderly populations. Basic services, meanwhile, will be increasingly costly because fewer young workers will be available for strenuous and labor-intensive jobs. Unfortunately, policymakers seldom reckon with these potentially disruptive effects of otherwise welcome developments, such as higher life expectancy.

Goldstone has a good grasp of the demographic issues.  There are significant challenges in the years ahead, but there are also incredible opportunities.  The problem in the developed world (particularly parts of Europe and Japan) is that with a an aging and shrinking population, there is less aggregate demand.  Who, exactly, are you going to sell your products to when every year there are fewer people alive and able to buy?  Who are you going to sell your house to?

This has never happened in the industrial and post-industrial eras.  Never.  It is truly unprecedented.

But, within the shrinking pie, if you can figure out a way to gain a bigger piece of the pie, there are opportunities.  In Japan, for example, the robotics industry is booming.  Robot labor is partially filling a gap left by the aging and depopulation of the country.

The opportunities are out there.  You just have to look for them.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

HS Dent has an ongoing commentary on the Harley-Davidson Motor Company.  As any of Harley’s dedicated (fanatical?) fans worldwide will tell you, the company makes excellent bikes.  In addition to the quality craftsmanship, Harley comes with a certain image and a feeling that can’t be replicated.

Unfortunately, it also has an extremely narrow customer base: the typical Harley rider is a white male in his mid to late 40s.   Two important factors tend to converge around that age: the mid-40s is when the male mid-life crisis tends to hit.  And, perhaps equally importantly, the average American man lacks the disposable income to afford a Harley until he reaches the peak earnings years of his 40s (or, perhaps recently divorced in his mid-40s as many Americans are, the man finally has his wife out of the way and feels liberated to blow his money on toys for himself again). Read the rest of this entry »

Continuing our Christmas Carol theme, every married man knows how pointless Christmas presents are.  If you buy your wife’s present yourself, she isn’t going to like it, and if she picks it out herself, then what is the point?  You might as well just give her the money and cut yourself out as the unnecessary middleman.  But, if you want to stay married, you have to throw logic aside and continue playing this little game.  This same basic logic also applies to mothers, sisters, and children of both sexes. (Men have a unspoken pact among themselves, however: you don’t get me a present and I don’t get you one, and we both have one less thing to worry about, bud.)

At any rate, let’s see what those cold, hard academics at the Economist had to say about it.  In reviewing the new book by Wharton professor Joel Waldfogel, Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays, the Economist writes,

Mr Waldfogel objects to the ritualised frenzy of shopping for gifts that precedes the enormous meals and awkward family reunions that are the other hallmarks of Christmas in the Western world.

Such complaints are hardly new…[b]ut unlike most criticisms of festive wastefulness, Mr Waldfogel’s objections are based on economic theory rather than morality or taste.  When people buy something for themselves, they believe that their purchase is worth at least the price paid.  But most gift-givers are only dimly aware of the desires and tastes of the beneficiaries of their largesse.  As a result, they often give people presents that are worth far less to the person getting them than the gift-giver paid for them.

The result of all these inappropriate presents—ranging from the sweaters that people will never wear to games they will never play—is what Mr Waldfogel calls a “deadweight loss” from Yuletide generosity.  This is the difference between the satisfaction a person gets when she spends a dollar on herself and when a well-meaning benefactor spends that dollar on a present for her.  Over a period of time, a series of surveys have led him to conclude that the average deadweight loss from gift-giving is around 18%.  Given his estimate that Americans spent $66 billion on Christmas presents in 2007, this amounts to a whopping $12 billion of lost value.  Where others see generosity, Mr Waldfogel sees an orgy of value destruction.

The professor’s solution to this problem of deadweight loss?  To forgo presents and just give cash instead.  Though we have no knowledge of Professor Waldfogel’s personal life, we’re going to have to assume he’s a bachelor.  And that he was raised by a single father, or perhaps by a pack of wolves (males wolves, at that).  But we digress…

There are some economic inefficiencies that you just have to accept if you want to have a happy home.  And the wanton wastefulness of Christmas is one of them.

On a side note, even in this difficult economy, we expect a bubble of sorts to develop in all things Christmas related, at least in the United States.  Christmas is, primarily, a holiday that centers around children (the same can be said of Jewish Hanukkah and Muslim Eid, of course).  With American birthrates currently at levels not seen since the original post-WWII baby boom, in the next decade there should be unprecedented demand for everything from mall Santas to fake snow in a can.  Toy stores should also do quite well in the years ahead, even if the economy continues to flounder.  Most parents would sooner hawk a kidney than allow their children to be disappointed on Christmas Day.  So, astute investors should look for ways to “invest in Christmas” in the years ahead, taking advantage of what promises to be a demographic tidal wave.

Link to Economist article– Scroogenomics: Give Gold, Not Myrrh.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

One of our Demographics School attendees forwarded us two articles we thought we’d pass on:

“The American Who Manages the Decline of a Japanese Hamlet“  Wall Street Journal

“In Aging China, A Change of Course” Washington Post

It’s a week before Christmas, and we can’t help making a comparison here to Charles Dickens’s A Christmas Carol.  In this case, China is Scrooge and Japan is the Ghost of Christmas Yet to Come.

The difference is, unlike Ebenezer Scrooge — who had the ability to change his ways and avoid his unfortunate fate –China’s future cannot be changed.

In comparing China to Scrooge, we are not referring to Chinese labor practices or implying that China’s labor force consists of millions of unfortunate and underpaid Bob Cratchits.   It’s not China’s wages that we consider misery, but rather its birthrate.

Demographics are the future that has already been written, and China’s future looks bleak indeed. But first,let’s look at Japan.  The Wall Street Journal article above tells the story of an American whose job it is to manage the slow death of a small Japanese village.  While one village might not be particularly significant in the grand scheme of things, the same is occurring throughout Japan.  The island, with the exception of a small number of large cities, is slowly being depopulated.  Falling birthrates throughout the post-WWII era have insured that Japan will continue to shrink for the foreseeable, with serious consequences for the stability of the country.

China isn’t to this stage yet.  But after 30 years of the One Child Policy, it is only a matter of time before the day comes.  Even if China were to suddenly reverse the policy — which is unlikely — the damage has already been done.  And, as the Washington Post article recounts, Chinese families have become accustomed to the One Child Policy.  Many simply cannot afford to have a second child even if they wanted one.

So again, unlike Ebenezer Scrooge, it is almost certainly too late for China to change its ways.

Related post: “Some Geopolitical Musings”

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

This might be our favorite headline of the past year: “Free ketchup off the menu as companies stay focused on costs.”

The article relates the story of a Houston, Texas hamburger joint that charges 15 cents per extra packet of ketchup.  Some other examples of Spartan cost cutting:

Across Houston, this downsizing has taken many subtle forms. Some pizza delivery companies now ask take-out customers if they want crushed red pepper and Parmesan cheese with their orders, instead of just throwing them in the bag. Some have started giving customers just one napkin, instead of a stack.

Dentists who before the downturn gave customers fluoride treatments as part of their annual cleaning are charging $30 (£18) extra for the cavity prevention.

The New York Times also had an interesting example of changing pricing and spending patterns: “The sky used to be the limit for the price of designer jeans.  Now the sky is falling.”  It appears the bubble in jeans prices has officially burst.

The NY Times writes,

The $300 pair of designer jeans is now, courtesy of the recession, the $200 pair of designer jeans…  Like any commodity that becomes overpriced, there eventually comes a market correction. And denim’s day of reckoning was long overdue…

But the denim bubble has burst, and only a handful of such extravagantly priced jeans remain at the jeans bar…   During the modern gilded age, the spiraling prices of designer clothes had more to do with driving profits than the actual design or construction of a garment. Designers found they could charge a lot for the perception of prestige. Dresses and suits and handbags were priced like cars, and consumers didn’t blink. But with jeans, it just felt more obvious that some kind of game was being played; the basic elements, after all, had not changed substantially in decades: five pockets, cotton, some rivets.

Oddly enough, even with the price implosion of the ludicrous designer jeans market (isn’t the whole point of jeans comfort and the idea of simple ruggedness?), total sales remain high.  As the Times continues, “though average prices were down 1 percent, according to the research firm NPD — the pricing shift is reflective of a broader reset taking place in luxury stores.”

We like the term “pricing reset,” and we think the writer is on to something there.  We have our own word for it: deflation.  When demand falls, so do prices — and profits.  At any rate, we are not completely bearish on the luxury sector.  The Baby Boomers are now in their 50s — a prime age for many luxury purchases.   Demand in emerging markets has also proven to be robust.  Still, the recession did a fine job of taking some of the froth out of the luxury market.  The well-to-do might still spend some of their discretionary income on the finer things — but absurdities like $600 blue jeans will likely not make the list.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

The above title was for an article written in the WSJ, October 20, 2009.

This is a topic we have been harping on for a long time.  Earnings are beating forecasts, but in general (excluding Apple) they are far below previous years.  Even then, those earnings were notched by reducing costs, which is a nice way of saying “firing people.”  This is nothing new, so I won’t spend a lot of time on it; I just want to make sure that we are keeping our eye on the ball here.

What is new, or rather what is subtle, is the change that is happening before our eyes.  For more than 20 years we have been talking about the change in consumption that would happen as our largest cohort (boomers) passed the age of peak spending.  We tried many times to paint a picture of what that world might look like.  In my mind, we always fell short.  Readers and listeners were always left with the impression that everything goes down, and must decline in a straight line.  It doesn’t happen, and isn’t happening, that way. 

What we’ve done is lower consumption, that much is true.  We have also changed what we consume.  Gone are the big ticket items that scream financial success (bigger, newer cars, for example), but also require a lot of financing.  It might not feel like it to the individual, but the minute we stop using debt to finance, we cut off one of the main sources of lifeblood to the economy.  We might still spend close to every nickel we have.  We might continue to eat out and buy new clothes. Without the turbo-charged effects of credit, the economy will still soften.  If we actually add savings on a continued basis, the effects are even greater.

The outcome remains the same - unemployment.  Which is the premise of separate but related article in the Journal today, “Firms Keep the Brakes on Hiring“  (the title is a little different online than in print).  Why wouldn’t they?  Demand has not returned, no matter what the MSM says.  Our current measure of hours worked in a week in the US is 33, the lowest on record (since the 60s).  When business picks up modestly there is no need to hire more people, just increase hours worked a little bit.

Less demand, less employment, the same or rising expenses (cost of living, debt payments, etc.).  This is not a recipe for a quick recovery. 

I say this mostly in jest, of course.  Though I did start to wonder this weekend when I couldn’t find a parking place at the local outlet mall.  Patrons were parked in the grass, behind the dumpsters, and on the medians — which was odd given that it wasn’t a holiday weekend, the Christmas season is still a few weeks away, and there were no major sales to speak of.

The weak dollar has had its benefits for South Florida.  Though the local economy has been in the tank (one of the worst in the country) the relative weakness of the dollar has encouraged foreign tourists to frequent the area’s many high-end outlet malls.  But this past weekend, it was only the familiar Chicagoland and New Jersey snowbird accents that could be heard.

Even stranger was the fact that this increased mass of people were pursuing a diminished stockpile of goods that are now selling at much less attractive prices.  The phenomenal sales of a year ago are no longer to be found, and neither is the selection.

So…is this is?  Is the recession over? Read the rest of this entry »

The Census Bureau Retail Sales Report reported nothing new under the sun (download here).

Auto sales plummeted immediately after the Federal “cash for clunkers” program expired (see chart below), and total sales ex-auto, while up slightly from August, were down significantly from the previous September.

Across the board, virtually all product segments saw declines from September 2008.   Food, general merchandise, and sporting goods were more or less flat and health products were up slightly. But everything else was down, and generally by a lot.

So, while things are improving, we are still a LONG way from a full recovery.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy