The China Conundrum

Recently, Peter Chiappinelli, portfolio strategist at institutional money manager Grantham Mayo Van Otterloo & Co., stated bluntly that "China is experiencing the mother of all bubbles." Indeed, the investment world has grown increasingly wary of the rapid growth of China and its stratospheric rise, as evidenced by the fact that, in 2011, China-focused funds suffered outflows of $1.2 billion, or 17% of the $7 billion total.

The Inflation Factor
China has recently been struggling with inflation. In January, it experienced a significant jump in inflation to 4.5% in January, a development that has surprised forecasters. Alarmingly, food prices continue to soar in China, rising by 10.5%.

The Lending Factor
This factor is directly related to China's inflationary problems, but it merits its own category due to the degree to which China has extended itself in terms of lending. Since early 2009, Chinese banks and financial institutions have engaged in a record lending spree that has helped back state-owned companies and financed huge infrastructure and property projects. Moreover, the central government has loaned more than $1.7 trillion to provincial and city governments, which in turn have provided stimulus that has fueled increased inflation and a growing real-estate bubble.

The Demographic Factor
China is experiencing demographic strains which are putting a damper on prospects of future prosperity. Because of the one-child policy, China has one of the most rapidly aging populations in the world. Moreover, China is experienced a huge exodus from the countryside to the city, one unparalleled in modern history. This exodus in turn has led to skyrocketing food prices and food inflation as well as a societal imbalance that will continue to plague China. China is also suffering from gender imbalance: China now has 32 million more males than females under the age of 20 and the latest figures show that for every 100 girls born in China, 119 boys are born.

Link -
http://seekingalpha.com/article/377651-the-china-conundrum?source=email_macro_vi...
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What happens, when China's biggest external customers (Europe & the USA) experience a deep Recession AND at the same time China's internal markets (customers) start going into reverse, as China's Baby Boomers fall off the perch in droves and are not replaced because of China's one child policy?

What happens to those countries, who supply China with its natural Resources, such as Iron & Coal?

It_is_the_Darkness wrote on Feb 21^st, 2012 at 1:00pm:


Do you think the Russians MAY have a few ideas on that?

Emma wrote on Feb 21^st, 2012 at 4:15pm:


Well, China is culturally sexist.
Non-Western countries is where feminism should be directing its cause. They've got what they fought for in the West. But in order to keep it going here they have to "invent" new forms of exploitation and oppression. Which is why I have close to zero tolerance for it.

Postmodern Trendoid III wrote on Feb 21^st, 2012 at 9:17pm:


what??!/ you have zero tolerance for sexism??  oh silly me-- as I said in prev post you'd find something to fault.

]Well, China is culturally sexist.[/b]  HEy BD I SAID THAT.  YOU have nothing worthwhile to say on the topic, it's clear.

Do you read and understand?? english?

Perfectly understandable old boy, in that case.!!

I respect greatness and excellence. This cuts through gender, race, and class. It is the preachers of equality infected with postmodern deconstructionist philosophy who analyse everything through the lens of race, gender, class, (and imperialism), and view everything in a dialectic of oppressor and oppressed.

I have no time for whingers in the Western world who cry exploitation and oppression when, in reality, hardly any exists. I see nothing but opportunities, and it is only the lazy or inept who fail to capitalize on those opportunities. 
Feminism in the West has achieved what it set out to achieve. Its goal now lies in "correcting" the countries of the East.

Is Demography Destiny?

Economists assume that people attempt to smooth consumption over time. The data are consistent with this assumption. If you follow a cohort of people over a number of years, you will observe that their income will fluctuate a lot more than does their consumption. Income generally rises sharply early in peoples’ careers, peaks out in middle age, declines gracefully toward retirement and then falls off substantially in retirement.

Meanwhile, people go into debt when they are young to finance the purchase of education, durable goods (like a car) and a house. Then they begin saving a higher proportion of their income as income grows and they build a portfolio that is used to supplement income in retirement. This income supplement includes income off the portfolio and proceeds of the sale of assets.

If a generation is particularly large, like the baby boom generation, this consumption smoothing can have important effects on financial markets and economic activity.

Large generations will tend to bid up the prices of assets during their accumulation years and then push asset prices down as they attempt to liquidate portfolios in later years.

Economists have indeed found strong correlations between demographic measures and economic activity and stock prices. For example, the baby boom spike in birthrates in the 1950s was followed 40 years later by a booming stock market and solid economic growth in the 1980s and 1990s (the 30-40 lag allowed the boomers to grow up to be big spenders and investors). Most early studies along this line have used a simple measure of the age distribution, like the ratio of the number of middle-aged people (40-49 years) to the number of older (>60 years) people (this is called the M/O factor) or the ratio of middle-aged to young (<30) (this is called the M/Y factor). Investigators have found strong positive correlation between the level of stock prices and M/Y or M/O.

One problem with this analysis is that the number of data points is pretty small. Major shifts in birthrate occur only every twenty years or so; therefore we have just a few useful data points over the past 100 years. It is hard to make a convincing argument using such a small sample. But, in an interesting piece recently published in the Financial Analysts Journal1, investment researchers Robert Arnott and Denis Chaves attempt to address this data weakness by examining data on more than 200 countries. In addition to looking at many countries, Arnott and Chaves attempt to obtain a richer measure of the age distribution than using the simple M/Y or M/O ratios. While they would like to use the full set of age group variables (that is, the percentage of the population aged 20-29, 30-39, etc), they recognize that doing so would not enable precise estimates due to the high degree of correlation between the various age categories. So, they represent the age distribution using a low degree polynomial.

Specifically, Arnott and Chaves run regressions of five-year average growth and returns against measures of initial conditions and the age distribution as represented by a polynomial. The purpose of using five-year averages is to filter out transitory or so-called “high frequency” effects on growth and returns. The purpose of including a set of initial conditions (current growth for the growth equation, current bond yield for the bond equation and current price earnings ratio for the equity return equation) is to control for the state of the business cycle and current asset valuations.

Results
The major conclusions are consistent with prior research. The most favorable demographics conditions for economic growth are large numbers of people in their 30s and 40s. The most favorable demographic conditions for bond and stock returns are large numbers of people in their 50s. These results suggest that the impact of an aging population is first to slow the rate of economic growth, and subsequently to reduce investment returns.

Based on their regressions, Arnott and Chaves project dismal prospects for economic growth for Japan and much of Europe over the next decade or two. The growth outlook is not so good for the U.S. as well.

On the other hand, growth prospects are pretty solid for much of Africa and South America. Likewise, return prospects are poor in Western Europe and Japan and solid in Mexico, South America and Northern Africa.

Caveat
A major caveat is that there are many factors that affect economic growth and investment returns. The researchers attempt to adjust for these by using low frequency data and measures of initial conditions. But still, the results may easily be diluted by left out variable bias. Don’t bet the ranch on these results. However, they do support the narrative that investment returns in the U.S. over the intermediate horizon (next ten to twenty years) are likely to be lower than historical returns. This means you have to save more. It also suggests that investors should consider expanding their investment horizon to include emerging markets.

Link -
http://seekingalpha.com/article/419041-is-demography-destiny?source=email_macro_...
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I prefer the 50 year rule, which simply means that 50 is the average bewteen the years from 45 to 55, which are the largest Income Earning years for any generation & their largest spending years.

This can be verified by taking 1933, which was actually the bottom of the Global birth rate, which happened to co-incide with the Great Depression, then move forward by 50 years to 1983, which saw the start of a long upswing in Economic activity & Global Stockmarkets, but still within the confines of the usual Business cyclic periods.

This reached a crescendo during the period 1995-2006, which co-incides with the great Baby Boom, from 1945 to 1956. The Baby Boomer era was actually 1945-1964, but the peak year was 1956 and after that the Baby Boom start to decline.

I also agree that there are caveats abd that there are many other factors that affect economic growth and investment returns. However, these factors may be either positive or negative & on this occasion the other factors are similar to this Demographic issue, in that they are also mainly negative and they include -
1) Peak Energy
2) Peak Debt
3) Climate Change

So, good luck & watch the Debt!