We’ve often discussed demographics as a critical long (very long) term indicator – and, by the way, the message ain’t good. Goldman is finally catching up on the conversation. The main idea is that by looking at demographics, both on a national and world level, we can anticipate major trends in spending, real estate, and price pressures. For years, the developed world has known that it is facing a declining demographic profile brought on declining fertility rates and just the sheer size of the baby boomer generation. The emerging markets, meanwhile (except for China), maintained a younger average age, higher fertility rates, etc. Additionally, the savings profile in the emerging markets has helped sustain the overspending of baby boomers – and that was at the time when baby boomers were in a position to save on their own if they so chose, which they didn’t.
And now, the baby boomers are entering a phase of declining savings, and are facing structural challenges that will need to be financed. Goldman starts to analyze them. Here are the main highlights:
- Demographics are a major determinant of long-term current account trends.
- Countries with a high proportion of ‘prime savers’ (those aged between 35 and 69) are more likely to run current account surpluses.
- We show how demographic shifts have influenced global current account trends in the past 30 years, and what they imply for the next 20 years and beyond.
- We have seen some rebalancing from the extremes in 2008 but the process is not yet complete.
- Demographic shifts point to a cleaner split between emerging markets (mostly in surplus) and developed markets (mostly in deficit) in the future than is evident in the current, more complicated picture.
- Emerging markets (EM) could continue to lend to developed markets (DM) on average.
- Demographic forces may help keep global real rates low.
- The development of EM capital markets may be important in offsetting demographic pressures for capital flows from the EM to the DM world.
For the full article, click here.
It’s back – although, for some of us it was never out of sight: Europe is in trouble.
Greece is facing gdp growth rate of -3.5% and is now officially beyond low double digit unemployment (and rising).
Spain, in the meantime, is facing another liquidity crunch.
And the only thing saving the credit markets from freezing up is a quickly eroding common fund that is going to face some huge losses in the very near term. (See article here.)
Markets are down about 2% as I write this. Yesterday the market started realizing that in case of emergency, the Fed has only QEII at its disposal, but simultaneously realized that it can’t buy anything else. What to do? In a debt deflation cycle, all assets that were propped up by debt need to be deflated. Real estate is well on it way, but isn’t done, equities, and soon, debt itself.
The biggest surprise is the yen. It just keeps getting stronger. Is this unwinding across the world? Still? I don’t know, but the yen strength is one of the many disconnects in the market that make me anxious about the end game.
To be continued…
Fed just released its long-awaited decision – no change. Wow!
The real news came out of China where we see 2 major developments. First, there’s a slowing of growth in imports. Guess what that did to commodity and commodity related stocks – yup, they’re all down. Of course, they were only up because some in the investor community believed that China would rise forever. Silly rabbit. The second piece of data is that real estate prices are rising at a slower rate. Now, with something on the order of millions of apartments supposedly sitting empty, I’m surprised they went up at all. What will happen when they actually start to decline? Well, look for more fake numbers from the government, social unrest from the people, and more pressure on resource related stocks that will have to start pricing in a deceleration in Chinese growth.
Lastly, productivity and labor costs (from BLS):
Productivity decreased 0.9 percent in the nonfarm business sector during the second quarter of 2010 as unit labor costs rose 0.2 percent (seasonally adjusted annual rates). In the manufacturing sector, productivity grew 4.5 percent while unit labor costs fell 6.1 percent.
Future Recession Risks
by Travis J. Berge and Oscar Jorda
An unstable economic environment has rekindled talk of a double-dip recession. The Conference Board’s Leading Economic Index provides data for predicting the probability of a recession but is limited by the weight assigned to its indicators and the varying efficacy of those indicators over different time horizons. Statistical experiments with LEI data can mitigate these limitations and suggest that a recessionary relapse is a significant possibility sometime in the next two years.
For the full paper, click here.
There’s nothing more to say. The Fed is starting to recognize that risks remain to the downside. It supports the view that rates will be kept low for the foreseeable future.
Unless you live in an extremely sheltered community, signs of difficult times are hard to miss. In New York City, there are stores closed on virtually every block along Madison Avenue.
From BLS:
Total nonfarm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5 percent. Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work.
Private-sector payroll employment edged up by 71,000.
There’s some good news in this release: government employment fell and private sector employment edged up. Can’t complain about that one. One other side note: temporary hiring was unchanged. Many people view temp hiring as a leading indicator and it had been rising in the past couple of months. This might just be a summer blip, but worth noting.
The markets seem to be in a cheery mood, as does everyone on TV; so why am I still down? Spoiled milk.
Dean Foods came out with earning earlier today, and it wasn’t pretty. The company posted a profit of $44.79 million, or 25 cents per share, on revenue of $2.95 billion. That compares to a profit of $64.14 million, or 38 cents per share, on revenue of $2.67 billion during the same period last year. We’re talking a 30% drop in profits. The stock is down roughly 7% as I write this, but that’s not why I’m down (I have no position in the stock at the time of writing). I like looking at consumer staples for messages, and this one is loud a clear – consumers aren’t buying the brand name milk! They’re buying generic. They’re not buying less of it, just buying the cheaper version. That’s the problem, by the way, of selling commodities. When pressured, demand will flow to the lowest priced substitutes.
Anyway, if it was just DF, I’d hear the message, but not give it too much credibility. But Proctor & Gamble (PG) had the same message waiting. Earnings fell 12% from a year ago. Are people really switching out of their premium-brand toothpaste for the store brand generics?
DF already broke down a few months ago, so the market shouldn’t be THAT surprised. Could it go lower? Obviously. But in my mind, PG, which has held up well is even more vulnerable. It hasn’t participated in the recent rally, and its bretheren like JNJ, had a crappy month when the rest of the market was pricing in who-knows-what.
What’s next? Switching to generic drugs? Is there no end to the sacrifice? For all the inflation talk out there, these companies are sending us a message from the consumer. Spending is coming in, savings rates will rise, luxury and “wants” will be pressured, while “needs”-spending will flow to the lowest cost producers, pressuring margins and (I guess – eventually) valuations.
Disclaimer: no position in any stock mentioned. Not investment advice and should be used for informational purposes only.
In a new paper, Hoffmann, Shefrin, and Pennings explore the differences amongst investors in terms of preferences, individual biases, and goals.
Abstract:
Existing studies on individual investors’ decision-making often rely on observable socio-demographic variables to proxy for underlying psychological processes that drive investment choices. Doing so implicitly ignores the latent heterogeneity amongst investors in terms of their preferences and beliefs that form the underlying drivers of their behavior. To gain a better understanding of the relations among individual investors’ decision-making, the processes leading to these decisions, and investment performance, this paper analyzes how systematic differences in investors’ investment objectives and strategies impact the portfolios they select and the returns they earn. Based on recent findings from behavioral finance we develop hypotheses which are tested using a combination of transaction and survey data involving a large sample of online brokerage clients. In line with our expectations, we find that investors driven by objectives related to speculation have higher aspirations and turnover, take more risk, judge themselves to be more advanced, and underperform relative to investors driven by the need to build a financial buffer or save for retirement. Somewhat to our surprise, we find that investors who rely on fundamental analysis have higher aspirations and turnover, take more risks, are more overconfident, and outperform investors who rely on technical analysis. Our findings provide support for the behavioral approach to portfolio theory and shed new light on the traditional approach to portfolio theory.
The authors go on to answer the following:
Our investigation into the role of individual differences focuses on the following questions:
How do investors differ from each other in respect to the type of information upon which they
rely to develop their strategies? How do investors differ from each other in respect to their
general investing objectives and risk attitudes? To what extent do differences among investors
impact the composition of their portfolios, trading activity, and investment performance?
For the full paper, click here.
Fascinating reading for anyone interested in behavioral finance and economics, decision making processes, etc. Additionally, the paper cites numerous studies on the topics, which should serve as a valuable resource in and of itself.
Academic, General | Yaron Sadan | 
August 12, 2010 11:22 am | 
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