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Second Quarter 2014 Newsletter

posted on

Old and Fat, Lazy and Infertile

July 22, 2014

No, we’re not talking about your brother-in-law. Rather, it’s a fair description of the underlying trends that are helping to define the future global economy. Let’s take them one at a time:

  • OLD Humans have been adding to their life expectancy for centuries.* The average lifespan for Romans during the Roman Empire was 22 years. In 1900, the world’s average human life expectancy was only 30, and in 1985 it was 62 years. All these figures calculate at birth. If someone lives through their first year, their expectancy increases dramatically. The average life expectancy in the US is currently around 77 years. It is calculated that over a third of children born today in a developed country will live to age 100. Food supply, nutrition, healthcare technologies and increased personal hygiene are deemed to be the major reasons for this. Bottom line -- we are living longer, and this will have major ramifications for families, governments and the global economy. * The Royal Geographical Society (RGS.org )“Who wants to live forever? - Why are people living longer?”
  • FAT Worldwide obesity has nearly doubled since 1980.* Obesity occurs because of (1) an increased consumption of energy dense foods high in fat and (2) a greater physical inactivity due to the sedentary nature of many forms of modern work, more efficient transportation, and increasing urbanization. 65% of the world’s population live in countries where obesity and being overweight kills more people than being underweight. Last week Time magazine reported on a Census Bureau report that shows a significant portion of US baby boomers age 65 and older are either overweight or obese—72% of men and 67% of women. Obesity is a leading cause of global deaths, and is a major factor in diabetes, heart disease and various cancers. Obesity is preventable, both through changes in diet and increase in physical activity. * World Health Organization – www.who.int “Obesity and Overweight” May 2014
  • LAZY Modern day humans appear to be wanting to relax (spelled retire) earlier than ever, compared to their life expectancy. Prior to the last 125 years, most people, other than the rich, simply worked until they died. Life was really simple back then. Germany became the first country to introduce a retirement benefit in 1889 for those workers reaching 70 years of age. Remembering the statistics already quoted above regarding global life expectancies during that time, it is clear this first retirement benefit was only for those who were quite old compared to their life expectancy.

    When the US adopted Social Security benefits in 1939, the average life expectancy was 63, and those receiving benefits at 65 were close to death, at least statistically. Nowadays, US citizens can start collecting SS as early as 62, and by that age they have a life expectancy of 82. Twenty years is a lot of leisure, especially when the initial purpose of governmental retirement benefits was to act as a safety net for the last few years of life. As bad as this sounds, the US is one of the longer working industrialized nations. The OEDC* reports that 43% of the US population is employed between the ages of 60-64. That may sound low, but compare it to the following: Spain, Netherlands and German 22-23%; Italy, France and Belgium 12%; and those hard working Austrians 7%. The ramifications of ever increasing life expectancies and the public supported cost of long term retirements is a problem that all governments throughout the world will face.* Organization of Economic Co-operation and Economic Development.
  • INFERTILE Well, maybe the world isn’t getting less fertile, but it certainly is producing fewer babies per mother. Family formation is changing dramatically compared to just 30-40 years ago, and it points toward a future of decreasing global population. As an example, during the 1970’s, there were 4.7 births per woman in Brazil, 6.2 in Iran, and 4.3 in South Korea. Today, those totals are 1.9, 1.8 and 1.3, respectively.* Virtually all industrialized countries are under the 2 births per woman rate, and most other countries are trending in that direction. In addition, the most populous country in the world is already at 1.5 (China). Since it takes roughly a 2.1 birth replacement rate to stabilize the population, it is very clear that within the next generation or two, the global population will actually peak and start to fall. This is already occurring in certain countries. * Morningstar Magazine March 2014 “The Economic Implications of an Older World”

We are reviewing these trends because, both separately and in combination with each other, they will have profound effects on the planet’s social, environmental, and our favorite -- financial, future. With increases in life expectancies, and decreases in population growth, it would appear that humans will need to work more years then they currently do, or at least not depend on the government for multi decades worth of financial assistance. The global “graying” population will need different amounts and types of housing and healthcare. Becoming older doesn’t guarantee becoming healthier, as the health issues dealing with obesity mentioned above become more prolific. The older populous will have to deal with higher numbers of geriatric conditions and illnesses, which in turn will cause increased needs for certain types of caregiving.

These macro-economic trends will affect employment rates and sales patterns of all types of goods and services. Eventually, it is within the realm of possibility that the smaller population will be able to more equitably share its resources, thereby increasing per capita wealth. These trends may also cause more efficient usage of natural resources, so that the world may become a bit “greener”. Perhaps the most important financial aspect to these trends is the potential for a lower overall long term global growth rate. With a decreasing population, there may be no hyper growth economies that need to be balanced (as currently seen in the rapid growth economies of China, India, and other emerging market nations).

What can an investor do today to get ready for changes that may take many decades to be fully recognized? Frankly, our clients won’t have to do much. By owning diversified asset classes, you will be assured of possessing an ever increasing percentage of companies that will grow due to the changes that will come, and for the same reason you will own a decreasing percentage of companies that will shrink because of those changes. We will continue to focus on the areas of investing that can be controlled: (1) plan the proper risk/reward parameters in your portfolio in order to meet your financial objectives, (2) use Modern Portfolio Theory and other financial science to add value to the process, (3) limit expenses and turnover, (4) stay disciplined and work the plan.

If global growth slows due to mega health and behavioral trends, it will likely be matched with lower long term interest rates and inflation. In that case, long term returns on equities may shrink somewhat, but should continue to have far superior returns when compared to fixed income, natural resources and other types of asset classes. We will do our best to make sure your finances are able to deal with whatever directions the world’s economic trends are taking us. The only exceptions are your diet and physical activity. You will have to give us a bit of help with those two.

Second Quarter 2014 Asset Class Returns


The market apparently was not listening to all the daily talking heads as they attempted to wow us with their brilliant comments regarding high valuation, economic slowdown, political deadlock and other business fodder. It simply continued on its merry way, with most asset classes making healthy new market highs yet again this quarter. Let’s look at two asset classes in particular: Real Estate and Emerging Markets. Real Estate on both sides of the ocean led the way, making up for their barely positive returns in 2013. Year-to-date returns for both domestic and international Real Estate are already well into the teens. Emerging Markets finally bounced back from their negative 2013 returns. At a time when most investors were hearing continued bad news about them, these unloved third world countries strongly rebounded. Just as market gurus were pointing to the Emerging Markets’ exits, this out of favor asset class jumped in the opposite direction and punished sellers for their lack of faith. We instead make sure that your portfolio weightings stay consistent with their planned risk/reward parameters. That way, when an unexpected upward move starts, you are assured of getting your full reward. This demonstrates once again the genius of Modern Portfolio Theory and how asset class investing has the potential to deliver superior returns over the long run.

The US economy was kicked in the teeth early this year when hyper cold spells experienced by most of the country caused an unexpected slowdown in many industries. Bond yields expected to move up due to the Fed’s gradual tightening of its easy money policy actually went down. With this rise in value, bonds outperformed most equity asset classes. Bonds continued this trend in the second quarter, allowing for double digit y-t-d returns for long term maturities. With the warmer weather of the second quarter, economic growth has picked up a bit. The US is clearly having superior economic growth compared to its European counterparts, although market valuations are heftier as well. The European economy appears to still be about 18 months or so behind the US. As an example, the European Central Bank has recently eased their monetary policy, which is exactly the opposite of what is happening stateside. As you may have guessed, the valuations of European markets are below those in America.

So the stage has been set for the continuation of this staggered growth pattern. The US, with its higher market valuations, leads the way, while Europe follows with its slower growth and lower valuations. At some point US markets will become more fully valued and more money will flow elsewhere. These subjects are interesting to discuss, but we do not formulate specific strategies to attempt to time the market. For nearly five years, an investor could have said the same thing about the US’s higher valuations, and perhaps swapped more money into cheaper European stocks. The result would have been significantly lower multiyear performance.

We believe a better way is to simply keep your portfolio balanced among the agreed upon weighting of asset classes determined by your portfolio’s risk/reward parameters. When one asset class becomes over weighted, we simply rebalance, selling the overvalued and buying the undervalued asset class. In this way, we are able to buy low, and sell high, without ever having to try and time the market or forecast the future. If you have been a client through some “bad times” with us, you have seen first-hand that this Nobel Prize winning methodology and rebalancing has proven itself time and time again.

The heat of summer is in full gear, and matches the torrid pace of the current markets. We know at some point there will have to be a pause to refresh, or perhaps a meaningful pullback. But with major liquidity waiting on the sideline, the market has been unable to make any type of meaningful correction. So sit back, stay cool, and enjoy the remainder of your summer.


Frederick F. Kramer IV, JD
Chief Investment Officer
Dixon Hughes Goodman Wealth Advisors LLC