Stephen Jen on Demographics and Financial Markets
As I noted recently in my note on financial markets and ageing I am pretty impressed by the work conducted by Morgan Stanley's chief currency strategist Stephen Jen in the context of financial markets, sovereign wealth funds, sovereign pension funds, global liquidity etc. This is then to say that apart from the obvious contribution from Jen regarding currency analysis he has also crafted some pretty strong hypotheses regarding financial (FX) markets and not least the impact from ageing. Consequently, Friday's issue of the GEF also contains a note by Jen entitled Demographic Trends and the Financial Markets. Now, given my own use of Jen's work in connection to my own economic analyses and given the fact that I don't quite agree with everything Jen has to say I have a written up a response over at Demography.Matters. Here is my summary ...
In order to sum up why don't we have a look at the way Jen summarizes his main points;
"Demographic trends have important economic and financial implications. Without remedial action, global ageing in the developed world tends to raise the level of real interest rates, flatten the yield curves, benefit equities at the expense of bonds, and lower the value of the dollar."
By the reading the note above you could be tempted to believe that I disagree quite strongly with Stephen Jen. This would be a mistake. However, I do want to emphasise the two points noted above. Firstly, it does not serve us well for analytical purposes to narrate ageing in the context of dissaving since this takes us away from what happens in the transition towards this situation which we after all might not want to reach. Secondly, I think that we need to be rather careful with which economies we denote as 'old'. Of course all OECD economies are ageing but they are doing so in different tempi and moreover as I have argued above the real effects of ageing seem to materialize with notable non-linearities relative to the process of ageing itself which is fairly linear. Finishing of with Stephen Jen's work in general much of my own work on ageing and financial markets has transpired from Jen's continuous digging on the topic in the context of MS' GEF. Especially, his hypothesis on a decline in home bias in the context of Japan is a very important contribution to the big picture. Also, I am very sympathetic to the way Stephen Jen has been working his way towards this. Basically, he started digging on Sovereign Wealth Funds went on to Sovereign Pension Funds and then ended up with this important contribution to the debate which I am sure will be modified and refined as we go along. And all this over the course of a year in the context of MS' GEF; who the h'eck ever said that blogging couldn't add value?