Sunday, April 8, 2012

Demographics, Dependency and PE ratios - An Introduction

Demographics is being examined by many as a principal driver of share prices. It also lends itself as a tool for sectoral analysis both in shares, business activities and in real estate.

Some look at it in terms of opportunities for growth, others as an increasing dependency ratio causing net dis-saving, some in terms of the health sector versus eg consumer discretionary spending, or in terms of new apartments versus existing homes for capital growth.

Seeking Alpha, a US based, on line finance blog for which I am an occasional contributor, runs as one of its seven macro themes a section on demographics. There editors choices of articles on demographics are at:,editors-picks,articles 

Future changes in age dependency is an important macro factor for estimating GDP growth and sectoral performance. Age dependency ratio is the ratio of dependents--people younger than 15 or older than 64--to the working-age population--those ages 15-64. Data are shown as the proportion of dependents per 100 working-age population.. (World Bank)

Broad investment principles based on demographics
The general broad bases of demographics are that:
1. A rising population is a better investment environment than a falling population
2. A population growing over the next say decade the number and share of 40 to 55 year olds is a better place to invest than one growing the number and share of over 70's. 40 to 55 year olds are the saving and investing age group so the money needed to be invested grows, putting upward pressure on prices. Their savings have to go somewhere.
3. Consumer durables and discretionary spending is more likely to grow where populations are growing the number and proportion of 18 to 35 year olds as that is the age of first high discretionary spending (18 to 28) and household formation ( 25 to 35)
4. Health care and apartments (over houses) are better investments in populations that are increasing the number and proportion of 65+ people as they downsize, dissave, seek more frequent and complex medical interventions, move to apartments as the net benefit of yards disappears and singular responsibility for maintenance becomes an increasing burden.
5. Manufacturnig jobs will move easily to low wage, reasonably educated, young, active populations in preference to places with older, dependent populations with decreasing average health, assuming government settings are favourable to the investment required.

Some notable macro demographic trends

1. China, as a result of its one child policy, will start to have significant increases in its dependency ratio, and a stabilisation of its total population number within 10 years.
2. India has a more favourable demographic profile than China.
3. US dependency ratio increases are expected to put downward pressure on PE ratio's until 2020.
4. Europe has a slow population growth, increasing dependency profile which reduces attractiveness of new investment in many sectors and promotes more of a cash cow approach to fund investment in more attractive markets.
5. Japan has an aging population, increasing dependency ratio and there is uncertainty as to how dis-saving will effect government bond prices as the ageing population sells or redeems bonds to fund living expenses and the yields required for new issues in an environment of the highest government debt to GDP among developed countries.

Australia and demographics
There are two major impacts on Australian investment from demographics. Internal demographics is one, the other is the demographics of our most accessible (geographically and politically) trading partners.

Australia is forecast to have an increasing dependency ratio under most population growth scenarios that have any semblance of likelihood. (A scenario which targeted a stable dependency ratio of that in 2000 would require exponential growth in population at levels not politically achievable). The difference between various highly possible scenarios of population growth is in the rate of increase of dependency over time.

As will be seen below, China and Japan will likely move to reducing populations and higher dependency ratios, but India and Indonesia have relatively high birth rates and existing large populations. If these tow countries had high growth/high develoment/mercantilist government policies with low political risk, they would be extremely important relationships for Australia given their geographic proximity.

The table below shows changes to the Dependency Ratio (DR) under 2 population scenarios. Even if high immigration is used to defer the rise in DR, it inevitably happens other than in such large population growth proposals that they would be viewed as being totally unrealistic by virtually the whole existing population.
(source of data:

. Population . DR .
Year Std Fraser Std Fraser
1998 18.8 18.8 0.73 0.73
2018 22 31.1 0.84 0.73
2038 23.9 43.9 1.04 0.83
2058 24.5 50 1.15 1.03

Birth Rates
Population growth is largely a function of birth rates.

207 Japan 1.39
205 Italy 1.4
202 Germany 1.41
187 China (Mainland) 1.55
164 Australia 1.77
143 United Kingdom 1.91
128 United States 2.06
108 Indonesia 2.23
81 India 2.58

This table (based on data from Wikipedia) highlights that 2 of Australia's largest trading partners, China and Japan have significantly below replacement birthrates. Two emerging neighbours have relatively high birthrates, Indonesia and India. Most of the large developed countries other than the US have below replacement birth rates, particularly in Europe. One of China's largest markets for manufactures is Europe. The implication for Australia is that the major takers of our commodities are all in significantly below replacement birthrates and three of the main market places for the sale of goods manufactured from our commodities also have below replacement birth rates. Europe, China and Japan (as China and Japan are both large exporters and large markets).

Dependency Ratios
Dependency ratios were relatively high in 1960 compared to in 2000. The higher dependency in 1960 was largely a result of baby boom children still being at school and many young adults having died during the second world war. Dependency ratios are forecast to increase significantly over the period to 2030 for most countries involved in the Second World War which had a post war baby boom.

Broadly speaking, the global low in dependency ratios was around 2000 and they are now tending to increase globally, but not yet in all countries. Japan Italy and Germany had increases in 2010 compared to 2000, while China attained the lowest dependency since 1960 of any of the major economies largely because of its one child policy.


1960 1970 1980 1990 2000 2010
Australia 63.3 59.2 53.6 49.7 49.6 48.0
China 77.3 77.3 68.5 51.4 48.1 38.2
Germany 48.8 58.5 51.7 44.7 47.0 51.2
India 77.6 79.6 75.9 71.7 63.8 55.1
Indonesia 77.0 86.8 80.7 67.3 54.7 48.3
Italy 52.7 55.7 55.3 45.8 48.3 52.5
Japan 56.0 45.3 48.4 43.4 46.6 56.4
United Kingdom 54.0 59.0 56.1 53.2 53.4 51.4
United States 66.7 61.8 51.2 52.0 51.0 49.6

(Source of data: World Bank download from


Demographics change very slowly, both in size of population and in age structure including DR. However they do impact and ought be borne in mind, particulalry by younger investors looking to harvest macro trends over time. For older investors, even recent retirees, they may still impact your total return over say 20 years of life expectancy. Government and Central Bank policies and investor fear and greed are likely to be much more influential in the shorter to medium term.

Friday, April 6, 2012

Exponential Growth Forever - NOT!

The greatest failing of the Australian people is the failure to understand the basic implications of exponential growth. (paraphrasing/adapting Alfred Bartlett of university of Colorado).

The greatest failure of our leaders is to adequately prepare our children for the Limits to Growth.

There are a couple of basic things we should all know about growth, compounding and the exponential function..

1. The rule of 72 lets you estimate doubling times for any rate of exponential growth by mental arithmetic. Just divide 72 by the rate of growth.
2. During the next doubling period (at whatever rate is used) of resource usage we will use more of a resource than has been used in all recorded history.
3. Estimates of resource life at current rates of usage are highly misleading in the face of annual growth in the rate of extraction.

Let's look at a few simple examples, using assumed numbers.

Assume we have 300 years of coal at current rates of extraction, but extraction is growing at 7% pa. (it has averaged over 10% growth pa over the last decade). The doubling time for the rate of extraction is just over 10 years (72 (from the Rule of 72) divided by 7% is 10.something times).

That means that over the next 10 years we will mine more coal in Australia than has ever been mined in the whole of Australian recorded history.

In very simple terms which significantly underestimate the shortening of resource life in 10 year time the resource life will have halved to 150 years from now. In a further 10 years of the same 7% rate of growth it will have more than halved again to only 75 years, but there are only 55 of those 75 years left.

Add a further 10 years of 7% growth in extraction and we can see that again the extraction rate doubles (its just simple mental arithmetic), we use more than has ever been used before in that decade (for the third decade in a row), the resource life halves again to only 37.5 years but 30 of those years are already gone.

300 years of resource at current rates of extraction are gone in 40 years at 7% compound growth per annum. (if you do this with Excel the exact answer is it runs out in the 45th year.)

If you do this exercise with Excel you will find that at 7% compound per annum the resource runs out in the 45th year, but the importance of this exercise above is to show how simple it is to work out the doubling time of the current rate of extraction and a reasonable estimate of the time of depletion of current resources using mental arithmetic.

You can convert this story to oil, iron ore, copper, brick making clay, concrete components, whatever you like. You can do it for population size, the cost of a loaf of bread. How long will it take your city to double in population at x% growth per annum.

Please don't just take my word for this. Open an Excel spreadsheet and do the numbers yourself.

Now many will say more resources will be found, human ingenuity will overcome etc.  If so, what is the cost of extracting those additional resources going to be? And transporting them if oil is also growing in scarcity or cost of extraction?

Prof Albert Bartlett of the University of Colorado has an excellent video (in 8 parts on Youtube) and a transcript of the lecture available on his website. I commend it to you.

 111. Exponential Function transcript - Arithmetic, Population and Energy - a talk by Al Bartlett on the impossibility of exponential growth on a finite planet

111. Exponential Function - Video parts 1 through 4 of Arithmetic, Population and Energy - a talk by Al Bartlett on the impossibility of exponential growth on a finite planet

Limits of Growth
All this leads to consideration of  "The Limits to Growth", both the book and its principles.

This book forecasts the collapse of life as we enjoy it in about 2050 based on increasing resource scarcity.

While it has had many detractors, many of them have not read or understood the book.

In 2008 Graham Turner at the Commonwealth Scientific and Industrial Research Organisation (CSIRO) in Australia published a paper called "A Comparison of `The Limits to Growth` with Thirty Years of Reality".

It examined the past thirty years of reality with the predictions made in 1972 and found that changes in industrial production, food production and pollution are all in line with the book's predictions of economic and societal collapse in the 21st century.

 In 2010, Peet, Nørgård, and Ragnarsdóttir called the book a "pioneering report". They said that, "its approach remains useful and that its conclusions are still surprisingly valid... unfortunately the report has been largely dismissed by critics as a doomsday prophecy that has not held up to scrutiny."

The implications for poor populations (even in developed countries) and poor countries of increasing resource scarcity are profound. Resource wars and colonial subjugation to control resources are clearly possible and probably likely within 50 years. Some would say the Iraq war, East Timor and the Spratley Island tensions are all at least partly about oil.

Monday, April 2, 2012

Coppock Update for End of March

Only Japan has given a BUY on the Coppock Indicator (in its domestic currency, Yen (JPY)).

As at 30 March only the S&P and Nasdaq are not in negative territory and so not able to give an original Coppock BUY.

All Ords, Shanghai 180, Nasdaq 100 and FTSE 100 are in the lowest quarntile of Coppock values in their history from 1984 and 2000 respectively. The All Ords at a value of only 11 is almost in the bottom decile so one might expect an eventual BUY signal to be reliable.

Based on USD values for US ETF's and in the relevant local currency, each one has given a BUY in MACD (170, 150,20) but this is less reliable than Coppock and would have produced some whipsawing even over the period since 1 October 2011.

From the summaries below (taken from a review on Incredible Charts Free Version)
a) US medium and long bonds seem to have stopped rising in price, as do Gold and Energy.
b) Thailand seems close to giving a BUY,
c) Brazil, Germany, India, Japan, Singapore, South Africa, S&P 500 and emerging markets cyclical falls might be coming to an end, although prices look as they they might be on a short term down.

1-3 year US bond (SHY) Below Zero, Falling
7-10 year US bond (IEF) Above, Rising, Flattening
20+ year US bond (TLT) Above, Rising, Flattening

Australia (EWA) Below, Falling
Brazil (EWZ) Below, Falling, Flattening
Canada (EWC) Below, Falling
China (FXI) Below, Falling, Steepening
Germany (EWG) Below, Falling, Flattening
India (INDY) Below, Falling, Flattening
Indonesia (EIDO) - No Coppock generated (Short history)
Ireland (EIRL) - No Coppock generated (Short history)
Japan (EWJ), Below, Falling, Flattening
New Zealand - No Coppock generated (Short history)
Phillipines (EPHE) - No Coppock generated (Short history)
Singapore (EWS) Below, Falling, Flattening
South Africa (EZA) Below, Falling, Flattening
Thailand (THD) Below, Flattened
S&P 500 (IVV) Below, Falling, Flattening
UK (EWU) Below, Falling

Emerging (EEM) Below, Falling, Flattening
EMU (EZU) Below, Falling

Energy (XLE) Above, Falling
Gold (GLD) Above, Falling slowly

Original data for the above dashboard free from Colin Nicholson's Building Wealth Through Shares

All Ords End March 2012 Update

We are in the balance based on the indicators I follow.


All moving averages I follow are pointing up, other than 200.

All the moving averages crosses I follow are positive.

Long Term MACD (170,150,20) was a buy on 19/1/2012 according to Incredible Charts Free Version

Europe has created so much liquidity for the next almost 3 years that few expect a crisis for a year or more even though the PIIGS all have budget and trade balance and current account balance problems that are likely to be insurmountable for probably most of them without continuing drip feed by one subterfuge or other.

US is strong and defying Hussman's and ECRI's calls for recession. ECRI's recession call is so old as to be wrong, certainly in the sense that it was so early as to mislead. I think most people have just moved on to calling it a false call without further qualification or explanation.

Causing Caution

Coppock (14,11,10) has not yet signalled a BUY.

Resistance  at 4400 to 4450 in the All Ords is however very strong as can be seen in the graph at the bottom of the Dashboard. The All Ords has run out of steam above 4300 9 times and fallen back below 4300 and it was over 4400 back on 28 October 2011.

My modified Turtle which is set to minimise, but not prevent, whipsawing does not signal a buy until 4470.

China slowdown continues to bring on commentary and the MACD (170,150,20) is looking like it might break down which could reflect into Australia through commodity prices and volumes.

Australian Economy

Australia maintains the two, three or four speed economy, with those sectors not doing so well calling for assistance and interest rate cuts.

Full time employment and GDP growth remain positive(both YOY), house prices are falling only slowly on average (from some of the highest multiples of average incomes in the Anglo world) and not falling significantly in all markets and inflation has averaged above the middle of the target range for about 2 years, so there does not seem to be a clear macro justification for a cut.

Australia has a good safety net for those who have lost employment because of slowdowns in retail and manufacturing and there are opportunities for those with skills willing to move to mining and processing areas.

The Dutch disease, its likely long term impacts, and the situation in which we will find ourselves if we allow a hollowing out of most of the tradables sector remains a concern, but probably more appropriately handled through fiscal and other policies, not monetary policy.

 Nothing is certain in this world, but my expected outcome is no rate cut in April and none unless the are clear national problems with negative employment growth YOY, major falls in house prices, inflation below the target range (or a clear indication it is very likely heading there).

Sharemarket Outlook

My 3 main scenarios are:
1. continue range trading from a top not higher than 4450 back towards 4000
2. breakout above 4470 but a false break out and no Coppock trigger or a very shortlived trigger undone by the next European, US or Chinese concern. (Spain, Portugal and Ireland are in focus here)
3. breakout above 4470 and a medium term rise of 10 to 30% over 2 years.

If the market breaks out above 4470 I will be in for, say, 50% and if there is a Coppock signal I will be in for the next, say, 50%, but still wary of a crisis induced breakdown.