A user’s content and browsing history are monetizable assets.
Rather than tax, regulate or break up Facebook and Google, we should ask that they pay for the monetizable assets that they have so far mined for free. These assets are a user’s content and browsing history.
As with all types of mining, the tech giants have developed an innovative technology that they combine with an exogenous asset (an asset obtained from someone else) in order to make money. In their case, it is information and data. In the case of a traditional miner or oil company, it was copper or zinc or oil, or other resources.
Large declines in fertility will depend on raising female literacy above 80%.
Every few years, the United Nations Population Division releases demographic projections for the entire world and for every country, region and continent. Although the UN’s database is the most used source on demographics, the data is not equally reliable for all countries.
Countries in the developed world conduct regular censuses and produce detailed numbers that are considered reliable. Less developed countries conduct censuses on an irregular basis or are completely unable to conduct them and have instead to rely on demographic sampling. In the poorest countries of the world, most of which are in sub-Saharan Africa, censuses are infrequent or nonexistent and even sampling can be irregular and unreliable. Read more →
It is not an exaggeration to say that world demographics are entering uncharted territory. For the first time in a very long time, perhaps the first time ever, the dependency ratios (loosely, the ratio of dependents to workers) of all rich nations and of several emerging markets have started rising and will continue to rise for several decades.
This alone would be enough of a challenge for the world economy. But making things more complicated, it is taking place at the same time as the other big demographic transition of our age, the great population boom in some of the poorest nations of the world. Read more →
Of all major regions of the world, Europe has the most challenging demographics, combining a stagnant population and a rising dependency ratio. But within Europe, five countries have worse demographics than the European average: Germany, Italy, Portugal, Spain and Greece. Read more →
New home sales for February were stronger than expected, at an annualized pace of 539,000 units vs. 465,000 expected. This is good news because it is the highest number since early 2008. However, the chart below shows that we are still dealing with a depressed single-family housing market.
First, it is clear that we are very far below the peak recorded near 1.4 million in the mid-2000s. Second, if we dismiss that period as an irrational bubble, it is still a fact that a 539,000 reading is in the bottom half of the historic range of 400K-800K. In fact, if we ignore recessionary periods (shaded areas), new home construction has not been this low since the 1960s when the US population totaled under 200 million vs. about 320 million now and when household size was larger than it is today.
It is true that multi-family construction is now more prominent than in the past and that it mitigates the sluggishness in single-family construction. As seen below, multi-family housing volumes now exceed the high preceding the 2008 crisis.
But if we use a back of the envelope approach and use a figure in the low 300,000 multi-family annual units as an historic average, we could say that the last multi-family reading is about 150,000 units above average. We could then argue that these 150,000 were ‘shifted’ from single-family homes. (That may be a generous assumption, considering that a large share of these multi-family buildings are destined to be rentals. Nonetheless the higher demand for rentals can also be considered a secular ‘shift’ that should be counted.)
Without this shift in living preferences, we could then argue that single-family sales would have been about 150,000 higher and closer to a 700,000 annual pace. That is a much better figure than 539,000 but still not very robust compared to the past, given low interest rates, the growth in population and the decrease in household size. In my view, keeping these factors in mind, an adjusted figure north of 800,000 single-family units would be closer to the historic norm. We should therefore be looking for a monthly report of at least 650,000 single family homes before we can talk about a return to normal.
In US Housing and Demographics, I made an argument three years ago that the housing market would be weak until at least 2020 because of adverse demographics. So far, it looks like the recent data supports my thesis. Homebuilder stocks have risen since then. This is based in part on optimistic anticipation of greater home sales, and in part on the fact that homebuilders have been quite adept at identifying and directing their efforts at higher growth areas of the country.
(Chart updated on 30 November 2015 with ratio at 0.51)
The ratio of the price of gold to the S&P 500 shows two notable extremes that are clearly visible in the log-scale chart below. The first was a reading of 6.1 in January 1980 when gold spiked up to $850 per ounce and the S&P 500 was struggling to shake off the 1970s syndrome of “death of equities”, “misery index” and “malaise”. The second was 0.19 in July 1999 and subsequent months when gold hit a multi-decade low of $252.8 while the S&P 500 soared on the wings of the Nasdaq bubble.
A more recent high of 1.5 was in September 2011 when gold reached an all-time high of $1,895. The ratio has since retreated to 0.56 today which is a level not seen since the stock market highs of 2007.
It should be noted that the average for the ratio, since gold started trading freely in 1968, is 1.18, which means that it is now well below the average. Reversion to the mean here would mean the S&P 500 falling by half or gold doubling, or various combinations such as for example the S&P 500 falling by 35% while gold rises 35%.
There is no doubt that there is some exuberance in the stock market, but it does not necessarily follow that the ratio should quickly revert to its long-term average. After all, one may ask, why is this ratio even relevant? It is a question that is justified if you believe that gold should only reflect inflation expectations. Then it would rise or fall with inflation fears.
But in reality, there is more complexity in what drives the price of gold. Inflation numbers were similar in the 1990s and 2000s but gold fell in one decade and rose in the other. Therefore, inflation alone is not enough to explain its behavior.
What drives the price of gold will be the subject of another post. But here it is enough to say that it is driven in part by several factors which are the inverses of those that drive the S&P 500. It makes sense therefore to keep an eye on the ratio.
The growth prospects of Brazil, Russia and China are dimming, while those of India are flaring.
If one is a lonely number, then ‘I’ could be a lonely letter, at least when it comes to the ‘I’ of the BRIC countries. Brazil, Russia and China all face mounting challenges in 2015 but the road ahead seems wide open for India. The main concern with this opening statement is that it seems to be the view of a large majority of observers.
Still, a majority is not the same as a consensus and certainly not the same as an extreme consensus. In investing, the consensus view is often right but the extreme consensus is absolutely and always wrong. For example, the consensus to buy tech stocks in 1997 was right but the extreme consensus to sell all non-tech and buy only tech in early 2000 was very wrong. When it comes to India, we are with the majority view, edging into consensus territory, but still far from extreme consensus. There remain enough doubters to ensure that this story still has plenty of time to play out.
Our approach to the topic is resolutely from the point of view of demographics. Demographics are not the be all and end all of an economy, but they are a very important vector, one of three very important vectors, the other two being innovation and institutional strength. Looking at the BRIC countries, the demographics of Russia and China are poor and those of Brazil are neutral. By contrast, the demographics of India, though challenging due to the large population size, could hold much promise if this huge newly created human energy can be harnessed and channelled in the right directions.
In general, the best demographic profile for an economy would be a rising population coupled with a declining dependency ratio (the ratio of dependents to workers). The increase in population means that demand for goods and services continues to grow. And the declining dependency ratio means that there is plenty of discretionary capital for consuming and for investing.
The US, Europe and China were in this sweet spot until six or seven years ago. Indeed, much of the world was in this sweet spot, a fact which largely explains the enormous creation of wealth and improvement in living conditions for billions of people in the past few decades. Things got more challenging in the middle of the last decade when dependency ratios in several countries bottomed out and started to rise.
We can’t blame the 2008 crisis on demographics alone. There were many abuses and excesses in the system which brought about the crisis. But it is worth noting that the crisis struck about the same time that a big reversal in demographics was taking place. A crisis would have come any way but instead of 2008, perhaps it would have come in say 2012 if the dependency ratio had bottomed four years later than it did.
Nor should anyone be surprised that Japan peaked in the late 1980s and has been struggling since then. Its dependency ratio bottomed in the early 1990s. Or that China saw a huge boom since 1980 after it introduced its one-child policy, thus engineering a very steep decline in its dependency ratio. Or that the US recovery has been slow, given that its population growth has slowed down and its dependency ratio has been rising.
As shown in the first chart above, India is the only BRIC country with a declining dependency ratio between now and 2030. Russia and China’s are already rising and Brazil’s will bottom and rise by the end of this decade. Russia seems to be in the worst shape since it has both a declining population and a rising dependency ratio.
Finally two quick words on the other big vectors of economic growth: innovation and institutional strength. Innovation in Brazil, China (ex-Taiwan) and Russia has been slow and cannot be considered a factor in future growth. There was plenty of excess capital to invest in new businesses when the dependency ratio was declining in all those countries but it went instead into real estate and other unproductive investments. Innovation has been slightly better in India and could take a big leap forward with more capital investments in the decades ahead. India also has an immeasurably greater competitive advantage compared to the other BRIC members: its population speaks English.
Institutional Strength can be the subject of endless debate, especially if we try to draw comparisons across countries. All emerging countries have to make significant progress on this account.