Gerald Ashley: 0:00

Hello and welcome to this edition of Equital Conversations. My name is Gerald Ashley and, as usual, I'm joined by my friend and colleague, George Cooper, and today we're going to talk about probably one of the biggest topics, which is demographics and, importantly, the transitions that seem to be going on right around the world with both growing and shrinking populations. George, welcome. Thank you, Gerald, Good to talk to you again. I think it'd be quite nice if you just gave us a quick tour of the big picture of what's going on. I know throughout our lifetimes we've been fed the story that world population is growing and is a huge problem, but things seem to be on the turn. Is that right?

George Cooper: 0:47

Yes, gerald, we've been doing a lot of work on the demographic issue, and the more we study it, the more important it seems to be and the more urgent it seems to be, as in we're already in the demographic transition, and when I say demographic transition, I mean we're moving from an expanding population to a contracting population. At the same time, we're moving to an increasingly top heavy population, as in, an older population, with a rising pool of retirees and a shrinking pool of new workers coming through, and this is, I think, one of the big changes that's going to drive economies and drive society, for that matter, but particularly drive financial markets and asset markets for the next few decades.

Gerald Ashley: 1:43

This is our old friend, the baby boomers, isn't it? They sort of after the war through to the early 60s, this big lump of people that in many ways have been a sort of golden generation, because they've done very well financially out of that period, despite all the problems of inflation and slump in part of the 1970s around the world, and now they've made it into retirement and a lot of them are sitting on quite a lot of net wealth. And, as you point out, though, underneath that is this much smaller base, and I know it's anecdotal, but here in the UK we get stories of people being in their mid-30s, maybe 40, even before they can afford to buy a property, and so there's a lump of wealth sitting in the plus 60s and there's going to be a problem going forward, isn't there?

George Cooper: 2:39

Well, yes, so there's two things going on. Well, yes, so there's two things going on. There's the retiring baby boomers because, as you alluded to, after World War II, basically around the world there was a sudden resurgence in the birth rate, had already fallen to below replacement levels. It was already well below two. So, briefly, for a couple of decades before World War II, the populations were contracting. Then, suddenly, after World War II, there was this boom in births and that went on for two or three decades I think I was probably the very end of the baby boomer, I think maybe even the last year and those baby boomers are now starting to retire.

George Cooper: 3:37

But that's only, that's only one of the big things that's going on, because the other thing that's going on, the other big demographic shift, is that fertility rates, which are quoted in the, the number of births per woman yes, fertility rates are collapsing and they're they're falling really everywhere around the world, apart from a few countries in sub-Saharan Africa. Basically, yeah, and critically, the rate at which, or the fertility rate that's needed to sustain a population, is about 2.1 children per woman. In the UK now it's about 1.4. Some places like south korea it's around 0.7, so it's a really dramatic I mean, this is alarm bell territory, I would have thought.

Gerald Ashley: 4:34

And um, there's another little twist to this. Of course, there's increased life expectancy. Um, as a child, I can recall people being my grandparents generation, really rather pleased if they made it into the mid-70s. People now feel a bit cheated if they don't make it to the mid-80s, and all of us, I think, would like to think we're going to make it to 90. But of course that longevity comes with a big lump of cost. So so this is interesting, isn't it? You may have a wealthy cohort, but they're going to need that money if they're not economically active, as the phrase goes, for the last 20, 25 years of their life.

George Cooper: 5:19

Yeah, well, you've come straight on to the pension issue, which I think is hugely important in this demographic story, because what what people forget is that any pension system is just a way of splitting up the the effectively, the resources manufactured by an economy in any one year. It has to be divided between the workers that made that output and the pensioners, and we've got different, different ways of doing that. We can. We can do it through taxation. In other words, we take, we take a slice of the income off the workers and we give it to the pensioners. Or we can do it through a saving mechanism, which is the new way, the defined contributions way, or the defined way in asset markets, if you like, and that is to persuade or coerce workers to save a portion of their pension into financial assets which they then have to sell in the future in order to fund their pension.

George Cooper: 6:31

Now, the key thing here is, while the baby boomers were working, they were buying a lot of financial assets, and they were buying financial assets essentially from an earlier generation who owned them, which was smaller. So you had a big set of buyers buying from a smaller set of sellers, so we can see the market impact there straight away. Yeah, so you get asset inflation and most obviously you get it in housing markets where there's more people trying to buy the same stock of housing, or a slowly growing stock of housing. As we flip into a contracting population, you're going to have a bigger pool of people trying to sell their assets, essentially to their kids, but there's fewer of them, so they're going to have to be persuaded to buy them at cheaper prices. So we may go from asset inflation to asset disinflation, which will be for those of us living in the UK. To see the housing market eventually turn down would be the shock of all shocks?

Gerald Ashley: 7:48

I think yes. Also, this completely flips the story around from 1945. And have we, in retrospect, been through a very golden age of, as you say, acid inflation, of, as you say, acid inflation, plenty of young people essentially contributing into the pot and, as you say, they now want to withdraw and too many people are going to try and hit the exit. One other element to this might be that the state is going to get involved here, aren't they? Because they're always winners and losers. So there's going to be a larger group of not wealthy elderly people who live to a great age, and so the state is going to have to take a slice to support them.

George Cooper: 8:40

Absolutely. I mean, this is one of the things that came out of our research that quite surprised me, and that is, as we looked closer and closer at the consequences of the demographic transition, I was sort of dragged, kicking and screaming, into the camp of being a gold bug. Oh gosh, yes, which is the mirror of that, is being very concerned about what's going to happen with the government bond market. So essentially we've got, I think, a clash or a clash is not a bad word between demographics and democracy, in that the older cohorts tend to be most active in voting. They're quite assertive in voting for their rights. This is one of the reasons we have a triple lock on the pension system in the UK.

Gerald Ashley: 9:44

And to widen it. If you look at somewhere like France, the inability of any French government to raise the state pension age I think it's at 63, or even maybe the proposed level and there's a huge pushback by the electorate.

George Cooper: 9:58

Yeah, so I mean, one of the reasons I'm actually, long-term, quite optimistic about this demographic change is because I think it can be dealt with. But one of the key things that has to be done to deal with it is you've got to keep raising the retirement age to keep the ratio of workers to retirees in some sort of reasonable ratio. Yes, and that's sort of it's easy to say that, but when you come to do it, of course the political party that suggests it first immediately gets voted out of office by the pensioners.

Gerald Ashley: 10:41

Absolutely, and I think I'm open to correction on this. But I think there's this story about bismarck, when they introduced the um, first sort of state pension scheme around the world, in germany um, pre um, I think it's about the 1890s, certainly pre-first world war, 1880s even and the idea was that, um, that pension would cover you for the last couple of years before you departed the planet. Now, obviously, if you think that people are let's keep it simple that people are going to work, say they live for 80 years and they don't really become very economically active until their early 20s, the idea that you can hang your boots up at 60 or maybe even 70, as you point out, is going to be not sustainable.

George Cooper: 11:30

Yeah, Well, as a society, we're burning the candle from both ends, in that we're telling our kids to stay in higher education for much longer.

George Cooper: 11:43

So now most kids go to universities, do a degree and, incidentally, incur a lot of debt while they're doing that. Quite a lot of them go on to do higher degrees. So a lot of younger people are not joining the workforce until, let's say, early to mid-20s. Indeed, there's fewer of them anyway. They're joining the workforce with a big debt load already, and that in itself is probably part of the falling fertility rate story. Because they're joining in debt, they can't afford to have kids, because they can't afford the houses, because the baby boomers bid the prices up and they've got to pay off their student debt to start with. So you're getting this economic effect pushing the fertility rate down. And then at the other end, we haven't raised the retirement age proportionate to longevity, so you're getting a growing cohort of essentially benefit claimants who want the state pension, nhs, healthcare, things like that. So you're getting a smaller and smaller cohort of people that can be taxed to provide all of these benefits, and we're seeing it in essentially the rise of structural deficits in all major developed economies.

Gerald Ashley: 13:20

Which, at the end of the day, is just an accounting way of pushing the problem down the road. Basically, isn't it?

George Cooper: 13:25

Yeah, I mean we all like beating up on the current government for their fiscal improprieties, but the reality is they're actually stuck. No government can balance the budget at the moment in the current.

Gerald Ashley: 13:43

It's the old Irish joke If you want to get somewhere, don't start from here. Now that we've thoroughly depressed everybody in this first 10 minutes or so and you hinted at trying to be optimistic I'm just going to inject a silver bullet that's going to solve all of this, which is technology advances AI maybe just get better at producing power and mineral extraction, or, if that's not your bag, we will have brilliant solar and wind turbines, and all the rest of it Is innovation. Going to get us out of jail, george.

George Cooper: 14:28

Partially. Potentially it could. If we think about what creates economic growth, there's basically two things that create economic growth. The first one is innovation, and that is getting people to do more things, so productivity gains essentially, which means that one person this year can produce more than that same person in the previous year. The productivity growth is responsible for about half of recent economic growth. The other one is demographic growth. You just get bigger populations. One of the reasons that America has outgrown pretty much all the other countries in the world is it's gone from a very small population around 1,800, of just a few million up to close to 400 million, I think it is now. Their population has grown by just under 2% a year over the last 100 years or so, whereas the global population has only grown by just under 1% a year, whereas the global population has only grown by just under 1% a year.

Gerald Ashley: 15:42

So their economy is outperformed due to population growth a lot of it being immigration, which is, of course. I'm just going to barge in there and say there's a big elephant in the room in your thought here, because immigration, certainly in the g7 countries is, or wider western europe and all of north america, is, um a political hot potato that people don't want what they deem to be excessive immigration. But, um, as you say, might that be the way where the advanced economies stay ahead?

George Cooper: 16:25

Yes, in part. But the interesting? Well, there's a few interesting things here. One of them is I don't think the immigration story, apart from the social problems, the social tensions that it causes, I don't think the immigration story can be a long-term solution. Apart from the social problems, the social tensions that it causes, I don't think the immigration story can be a long-term solution because, as populations get richer, we're finding the birth rates are falling everywhere, even in India and the Middle East. Areas that are traditionally being associated with very high population growth, fertility rates are collapsing there quickly. Areas that are traditionally being associated with very high population growth, fertility rates are collapsing there quickly. So at a global level there isn't going to be enough immigration immigrants to sustain even the the western economies now I was um.

Gerald Ashley: 17:15

I was trying to say this was the optimistic part of this chat and you've dragged the straight back.

George Cooper: 17:20

So where is? The optimist, optimism in this I'm I am actually, uh, hugely optimistic about this transition because, uh, let's think about the, uh, the alternative scenario, the alternative that the population keeps growing unchecked forever, which was essentially the malthusian yeah we run out of everything and, yeah, the malthusian scare, which is that we just keep breeding forever and eventually run out of resources and starve ourselves.

George Cooper: 17:55

It looks like on a voluntary basis, we're we're fixing problem and as we fix that problem and the population goes into a contraction phase, provided we can stop that contraction phase at some point and stabilize the economy. But while the population contracts, of course all of the other things that we've been told to panic about environmental degradation, running out of energy resources, pollution, things like that we're going to fix all of those quite naturally. So I think there is a hugely optimistic side to this, Because we're learning to control the population. Because we're learning to control the population, we can see a path to a truly sustainable world where the population is sustainable without causing endless.

Gerald Ashley: 18:51

It's still loads of catastrophe headlines about climate change and degradation of the world in general and mineral shortages, etc. Etc.

George Cooper: 19:26

But do you feel there'll be a tipping point where that? You know it's not going to happen overnight, but this demographic story is just slowly going to overwhelm other things? Yeah, I, I think there is a. Effectively, there's what I call a fear porn industry. You know, this is a um, an industry that sells column inches by grabbing our attention and terrifying us and the climate. Global warming, which has now changed to climate change because we can't seem to find the warming Global warming has been the big fear porn that we've had for the last few decades. I think there's a reluctance in a lot of the media to talk about this demographic change because, of course, as we go to a contracting population, suddenly we've got less reason to worry about all the climate issues just not tangible.

Gerald Ashley: 20:22

I mean, I'm always amused in a totally different sort of sphere when there are government economic statistics out. Um, television film is always of manufacturing, bottling plants, steel plants and everything but we know of. Certainly in the uk and many major economies it's it's service industries that are generating most of the growth. But it's really boring to have a bit of film of people sitting in an office at an ad agency or or an accountant's or whatever it may be. And is this the thing about climate change? You know, it's got a, it's got a more tangible feel, um, and people uh sort of ascribe, uh quite reasonable events to climate change because there was a lot of flooding last year or there was more snow than we expected or there was no snow at all. But when, as a news editor, I've got to sort of, if you like, juice up the story about demographics, it's just kind of too slow, isn't it?

George Cooper: 21:19

It's, yes, I think that's fair. It's just kind of too slow, isn't it? It's yes, I think that's fair, it's too slow, but, as I say, it's also not wholly a negative story. So negative stories sell news, but if you write a story hey guys, the climate problem's fixed because the population's no longer exploding you're not going to get the attention and you're not going to get. You know, you won't get the sort of political traction.

Gerald Ashley: 21:50

I thought it was quite interesting that we've used the word transition for this demographic change and sort of flipping through the history books. If you look at a demographic shock, a well-documented one is the black death in Europe in the in the 1350s and that had a dramatic effect because a large percentage I think it was something like 20% of the population was wiped out and that immediately fed through into higher wages, almost the start of accumulated wealth from those who were still available to sell their goods. So is there going to be a shift towards labour, away from capital, with all this?

George Cooper: 22:41

Again, this is one of the reasons I'm actually pretty optimistic, gerald, because I think a lot of the reason behind the collapse in the fertility rate is economic and financial. As I say, we've heaped a big burden of student debt on young people and we've made the housing market too expensive for them, so they basically can't afford to have kids. But as we go into a world with a smaller cohort of workers and basically a big cohort of pensioners wanting their service skills you know the pensioner that needs to hire a plumber in the future well, they're going to have to pay much more money for the plumber. So wages are going to go up and wages are going to go up and probably house prices relative to wages are going to go up and probably house prices relative to wages are going to fall and it's going to become relatively easier for that next generation to live.

Gerald Ashley: 23:49

So is there a sort of self-limiting factor here, that things, you know, if we treating demographics, if we were still here in 100 years' time, will it have sort of resettled the new equilibrium? Do you think that?

George Cooper: 24:06

that's, that's the way I think it will go. I think I think as a consequence of the baby boomers and the way we've structured pension systems and education systems and things like that, I think we've we've created this situation where you've got a shortage of kids, shortage of children being born. That's then going to lead to higher wages in the future and that's then going to correct the problem. So I do see an equriating mechanism. I don't think, hey, we've gone down to 1.4 children per woman and that's just going to carry on until we're back at Adam and Eve. There's only two people on the planet. I don't think that will happen. I think we will go to a lower population level and hopefully it will stay and probably cycle around some some lower normal and and, and that's a good thing.

George Cooper: 25:07

So there's there's optimism there, a lot of optimism, but we can't shy away from the challenges of dealing with that transition, because we are going to have, for the next few decades, definitely a situation of more pensioners, fewer workers those pensioners that have been saving into their pension pots, that have been saving into their pension pots needing to sell those assets to the next generation, whilst at the same time voting not to reset the retirement age Indeed, indeed and requiring more healthcare services. So all of this leads it's quite a complex picture here, isn't it? It's a complex picture here, isn't it, to meet these demands, because we're probably already on the right-hand side of the Laffer curve, the more tax they raise the less they'll get.

George Cooper: 26:28

So they're going to do what governments usually do, which is print their way out of the problem. Hence my feeling that we're going to get a bull market, or we are already in the demographic bull market for gold. I think that's a reasonable way to put it. We're going to get monetary debasement. And then I think, when you think about asset markets we have grown up in a world of this big cohort of baby boomers coming into the workforce, making earning, generating tax for governments and that, and making government bonds seem like the safe haven asset. Yes, I think we're going to flip things around. Bonds are going to become, uh, the high risk asset, the one where you're going to lose your money through inflation, and, perversely, real assets like equities, uh, which have a degree of inflation protection embedded in them, they will become the safe haven asset. But, importantly, the one that we're all most reliant on, or the one that we're most convinced, is a permanent bull market. The housing market might not be the place to store wealth.

Gerald Ashley: 27:52

No, and it sort of rings in my ears as in my 20s and and 30s people said you know, get on the housing ladder as as quickly as possible. Um, as we, um, we just drilled down there a little bit into sort of asset classes. Maybe just a quick look at geographic spread, because there's some obvious economies are going to be hit by all these structural changes. So you know, the so-called developed nations, and what may be interesting to see is what's going to happen in emerging economies and really developing regions that are quite a way away from being modern economies. A way away from being modern economies. Maybe. Just to touch on a nice sort of point comparing and contrasting China and India India seems to have a very strong demographic base, with a lot of youthful population, and China's going the other way.

George Cooper: 28:55

Yeah, I think that's a great point, gerald. I mean, japan has led the way in this. China is a few decades behind, but it is going partly, maybe as a legacy of their one-child policy as well, but China's demographics is now looking very Japanese-like. Yeah.

Gerald Ashley: 29:23

I would agree.

George Cooper: 29:23

If you look at all the developed economies, if you strip out immigration, we're not that far behind Japan. And this is perhaps why in the UK, to a lesser extent in America, but particularly in the UK, this story hasn't really started to gain traction because although indigenous UK women are at 1.4 birth rate, so our population would already be contracting, but of course we've got a lot of immigration, so nobody feels like there's a contraction going on because there isn't.

Gerald Ashley: 30:08

And this is the argument. Isn't it about governments banging on about GDP numbers, whereas a cursory look at GDP per capita suggests that, in relative terms, we're getting a little bit poorer?

George Cooper: 30:23

Yeah, we're already contracting GDP per capita and you know the governments don't want to talk about that because the immigration gives them a sort of get out of jail free card and it's a good way of um effectively trying to bail themselves out of this fiscal deficit it looks like a short-term fix and it, but it isn't a sustainable.

Gerald Ashley: 30:50

No, but politicians love that um, but there's another.

George Cooper: 30:53

There's another aspect as well that I think is worth focusing on. So how do you manage this transition, if you think about the problem that everybody is faced with now. They're going to retire, they're going to have to sustain themselves in a world where the tax base is going up. They're going to live longer. There's fewer people providing the services for them, so the services are going to get more expensive. So your pension pot is going to be stretched much further and the money you get for those assets is probably going to fall short of what you expected because of the pool of people you're selling them to. So, to navigate that, I think we're going to have to do some thinking about how to do that, and a few things occur to us. One is you want to be investing those assets in economies that have got less of this demographic stress. Yeah, so the ones that are, um, uh, if you like, further down or further behind this process?

Gerald Ashley: 32:20

So do we, you know, say buy India rather than China, for example.

George Cooper: 32:25

Potentially. Yes, that would be one.

Gerald Ashley: 32:28

Not as an investment recommendation here and now, but just as a general theme.

George Cooper: 32:32

But the other thing that you might want to think about is that you want to be thinking about where are all of these pensioners going to be spending their money? They're going to be spending their money on health services. They're going to be spending their money on leisure services. It's what we call adding life to your years, and adding years to your life. You know so. You, if you are, if you're a pensioner, you want to add years to your life. You want to keep living. You want to live longer, so you're going to spend more money. You're retired now with fewer children and even fewer grandchildren.

George Cooper: 33:27

Yes, so you do have maybe less reasons to You've got more free capital You've got more spending power, yeah, and we think we're already seeing this now in in a rise in spending on travel and tourism, leisure, luxury goods, things like that. So I think being smart about where you put your money in order to benefit from effectively your other pensioners where they're spending their money- yeah this is.

Gerald Ashley: 34:05

It punches up all sorts of visions of pensioners trying to invest one another. I think, as we just come to the sort of maybe closing part of this conversation, though I have to say I think we could rattle on for hours and I think it may be that we will come back to this in some granular detail at a future conversation, but it looks to me like it's difficult structural change that will certainly go throughout our lifetimes In fact, in my case I'm part of the problem, I'm sure and it could be quite some time before things resettle. And of course, the government and political implications for all of this are particularly difficult. George, I'm going to suggest that you're right in the long term and we should be optimistic. I'm not so optimistic. I'm going to be there to see it, but we shall see. As ever, we finish off with a quick sort of idea for listeners on something to read, and I've alighted on a what I think is a really very good book, um called material world, by ed conway.

Gerald Ashley: 35:24

Ed conway is a journalist, he's the business editor for sky tv in the uk and he's written a a fairly quite a long tome about what he thinks are the six key commodities or minerals really that drive the world and how vital they are for modern life. And I mean there's some of the obvious ones like oil and copper, iron, but the one that stood out for me out of the six was sand. I don't go around worrying about the world sand supply, but he points out that in fact maybe we need to think very seriously about very, very high quality sands that are relatively limited and how we can make better use in the future. So very much recommend this as a book to read. It's not a specialist book, it's a generalist book. It's something you could kind of buy at the airport and, you know, read on holiday or whatever, if that's what you want to do. So there we go. Material World by Ed Conway. And what have you got for us?

George Cooper: 36:35

Okay, Gerard. Well, my book recommendation is the Gambling man by Lionel Barber. I think Lionel Barber used to be the editor of the Financial Times and the subtitle of it is the Wild Ride of Japan's Masayoshi Son, and it is about it's basically the biography of Masa Son, as he's known, the man who built SoftBank.

Gerald Ashley: 37:06

Which is a huge, huge enterprise over time.

George Cooper: 37:10

It is a huge investor in all sorts of technology. Um, alibaba is probably its most famous investment. But the fascinating thing about this this story is, as the title suggests, the gambling man is the absolutely extraordinarily uh large appetite that Massa had. He's made some truly wild investments. Many of them have been disastrous, but a few of them have been spectacularly successful, and it is a fascinating read. And it is a fascinating read. I would just give it one warning label, and that is I would suggest that probably 99 out of 100 people that followed Massa's risk management strategy would probably end up bankrupt. So just be a little careful with that.

Gerald Ashley: 38:18

But it is an interesting story, so it's a sort of reckless ride at risk in that sense.

George Cooper: 38:25

Yes, in this case he's obviously won. He's won big time. But I would give it a bit of a note of course, don't do this at home.

Gerald Ashley: 38:38

I think is the advice which opens up a huge topic about human behaviour and attitudes to risk, and that's something we're certainly going to talk about in a future episode, but for today, that's all there is from George and myself about demographics. Thank you very much for listening. Thank you.

George Cooper: 38:58

Okay.

Gerald Ashley: 38:58

Thank you, gerald, talk next time. Thank you very much for listening, thank you, okay. Thank you, gerald, talk next time. Thank you, bye-bye.