The Downside of Demographically-Driven Investment Strategies

John Mauldin runs an investment advisory group in Texas, and some of his published advice is available for free (albeit with a "subscription" so that they know who you are). I was alerted to the fact that this week's "Thoughts from the Frontline" from Mauldin has a demographic focus:

We'll continue our three-part 2014 forecast series this week by looking at the significant economic macrotrends that have to be understood, as always, as the context for any short-term forecast. These are the forces that are going to inexorably shift and shape our portfolios and businesses. Each of the nine macrotrends I'll mention deserves its own book (and I've written books about two of them and numerous letters on most of them), but we'll pause to gaze briefly at each as we scan the horizon. 

The first five of our nine macro-forces can be called the Killer D's: Demographics, Deficit, Debt, Deleveraging, and Deflation. And while I will talk about them separately, I am really talking threads that are part of a tapestry. At times it will be difficult to say where one thread ends and the others begin.

The major point of his demographic analysis is that an aging population is not necessarily very good for investment opportunities.

Demographics – An Upside Down World 

One of the most basic human drives is the desire to live longer. And there is a school of economics that points out that increased human lifespans is one of the most basic and positive outcomes of economic growth.

If you have read my book, you know first that human lifespan has not increased, but life expectancy has. That's a minor point. The bigger point is that economic growth per se is not responsible for improving mortality. Initially this was associated with the same scientific advances that brought us the industrial revolution, but that linkage is much weaker now due to the diffusion of public health and medical knowledge. Indeed, my research in Africa is based on turning that equation around--better health leads to higher economic productivity.

The demographic concern of Mauldin is that longer life leads to aging populations which are, in his view, less economically productive than younger populations. As you know, however, an aging population is created largely by declining fertility, not by higher life expectancy. Furthermore, the notion that older populations are "deflationary" is an hypothesis, not a fact. We haven't had enough such populations yet to really know and a lot of policy work is taking place in Europe to raise retirement ages and to create create flexibility in the workforce at all ages.

Finally, let me note that while the aging of rich nations is a demographic force with which we must reckon, investment decisions made solely on the grounds simply of a growing economy, rather than increasing per person income, may benefit an individual investor in the short term, but that doesn't strike me as a good long-term strategy either for the investor or the earth, more generally.