Demographics and Macroeconomics - Part 2 (Wonkish)
I don't suspect anyone remember part 1 of this series so if you want to refresh your memory, you can have a look here. In that note, I treated some of the more theoretical issues in the form of how demographics might affect long run growth as well as open economy dynamics. In particular, I discussed the broad tenets of the life cycle framework and how it relates to savings and investment behavior as a function of ageing. In particular, I discussed where I think there was room for improvement and further study.
So, in this one I would that I would look at an all together more practical topic in the form of asset demand and prices as a function of demographics. Again, this is a substantial area in the finance and macroeconomic literature and I will not give a detailed literatur review here. Besides, if you want to move straight to investment and portfolio implications this piece by Alicia Damley and this piece by Ed Dolan are really spot on in terms of what you need to think about. Basically, you want to buy the young guns and sell the old farts and the key to obtaining this insight is to remove the focus from population size to population structure (age structure). I have been harping about this since this blog's inception 5 years ago, I am doing a PhD about it, so it is with pleasure that I see the discourse hitting the tapes of Seeking Alpha which indicates that it is grabbing hold of other people than those stuck in the university ivory tower.
In this sense, this is hardly a new story . Emerging markets represent the main investment story in a post Lehman context. Everyone wants to buy India, China (although she is quite different), and Brazil and as a result of a myriad of ETFs and other types of market trackers, you don't need to know your way around the streets of Bangalore to gain exposure to the Indian growth story.
This is a turkey shoot then. And I largely agree with the main thrust of the argument.
The real maturing of the emerging world which began some 10-12 years ago and which will continue for the next decades is undeniably a force of good for savers and investors and the real question is whether it is too good, and thus whether there will end up being too much capital chasing too little yield. In order to understand this link, you would need the second part of the equation (see part 1) and understand how demographics affect capital flows and the transfer of savings between economies as a function of demographics.
In this note I will talk about the idea of a life course but in the way that it is traditionally narrated. As such, the life course is a sociological theory which describes phases of life and in this sense it is more topical than the idea of a life cycle which only describes the flow of investment and savings. Indeed, in finance and economics you only hear about the life cycle even if scholars who investigate for example the dynamics of house prices as a function of demographics essentially are deploying a life course framework.
What is the Life Course then?
Well, Wikipedia does a good job of explaining it for the layman and this small snippet also captures the essence quite well especially
In particular, it [Life Course Theory] directs attention to the powerful connection between individual lives and the historical and socioeconomic context in which these lives unfold. As a concept, a life course is defined as "a sequence of socially defined events and roles that the individual enacts over time" (Giele and Elder 1998, p. 22). These events and roles do not necessarily proceed in a given sequence, but rather constitute the sum total of the person's actual experience. Thus the concept of life course implies age-differentiated social phenomena distinct from uniform life-cycle stages and the life span.
The only mental leap you need to perform here is to replace socially defined events with economically defined events and you have yourself a working model. Now, if the finance geeks out there think that I am turning soft and if the sociologists believe that I am reducing their complicated theory of human lives into numbers and equations, both groups have my symaphaties.