Demography is destiny

The difference between the number of middle aged and old aged people is the most important demographic metric. It determines a country's potential for economic growth and asset price appreciation.

Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.

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Okay, I stole the headline for this article from Auguste Comte, a 19th century philosopher. But it just fits perfectly for what I want to talk about. Demographic trends are extremely important for economic and financial market performance. ‘The economy’ sometimes feels like an abstract thing. But it’s first and foremost simply about what people are doing. And they are doing things based on their life circumstances which are very dependent on their age.

Over the past years, I have occasionally referred to ‘demographic headwinds turning into tailwinds’ and that this will help this bull market. I believe it makes sense to dedicate an entire article to this matter as a refresher for long-standing subscribers and as a primer for new ones. My contribution to this topic goes beyond general talking points of the global ageing phenomenon. In my opinion, investors should approach this topic with more nuanced thinking.

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TLDR Summary

• I define Demographic Momentum as the difference between middle aged and old aged people in any given country. It’s a metric with extraordinary economic relevance that has historically exhibited strong statistical significance in explaining bull and bear markets. It matched the market tops for the S&P 500 in 1965 and 2000 and it played a crucial role in the Global Financial Crisis. It was also central to the bubble in Japan in the late 1980s and in China in the mid 2010s.

• This importance is due to our creativity, energy and willingness to take risks as we approach the mid-point of our lives. When sufficiently many of us are approaching that point of peak performance simultaneously, we drive GDP and stock prices. And when such a trend turns sour, things often get ugly.

• The US are about to experience a demographic revival which may become sort of a Dotcom echo. It’s an important pillar to my overall bullishness for the coming years.

• Other parts of the world, such as Japan, China and large parts of Europe are however looking into a demographic abyss with their Demographic Momentum getting progressively worse. As these countries and regions will have to fight for their economic relevance and wealth over the coming decades, there are a few interesting newcomers to take note of. Countries with very strong Demographic Momentum, which include India, many parts of Africa and developed countries with successful immigration strategies such as Canada and Australia.