800-CEO-READ Blog

I would agree that Mr. Siegel needs to check some facts. It's already well known that Europe is aging. What isn't well known is that China is going to age more rapidly than any other country in the next 30 years. Check the Population reference bureau date - http://www.prb.org/template.cfm?template=InterestDisplay.cfm&InterestCategoryID=242.

So, if he's looking to China for help, it ain't going to be there. China's population controls that began in the early 70s will be coming home to roost in a big way...a fact that seems to escape most people who think China is the next big economic giant. Hard to be a giant if most of the population is too old to consume or work a job...

The link of demographics to stock prices always bothers me.

Granted Rob Arnott (editor of CFA Journal and a serious industry thinker in himself) reckons what is going on in Japan is the Japanese moving to safer assets given they have the fastest aging population in the world. Part of his fundamental bullishness on index linked bonds.

But the supply of stocks should be largely price elastic. We are not talking about enormous amounts of money here relative to the total pool of assets out there. If the PE falls on the US market, either foreign investors will put more money in, or US corporates will buy back their own stocks.

(these are simply the mirrors of why the argument that the Baby Boom will drive higher stock valuations strikes me as specious-- if they buy stocks, and drive up the PE, then corporates will issue more equity, as they did in 1999).

The long run real return of stocks is the E/P. (normalised E, which is the tricky part)

The long run nominal return of bonds is the current yield to maturity.

The long run real return of index linked bonds is their real yield.

These 3 forecasting models have been proven and back tested again and again and again.

Jbr -

The movement of labour force from rural to industrial occupations should propel the Chinese economy for the next 20 or so years at the very least. The size of the shift is so titanic (several hundred million people) that the growth in the productively employed labour force will continue.

Granted post 2030 China has a demographics problem. But the next 25 years ago should be very good to China (the parallel period in American history is one where the dependency ratio soared (the Baby Boomers were net economic drains from 1946-66) but the movement of people off the farm and into more productive forms of employment was so dramatic that the US economy consistently grew over 3% pa for the entire period) . Something similar happened to Japan and Korean from 1960-1973.

The Chinese have a massive savings rate (more capital per worker), technology transfer from the West (the modern nature of their factories is shocking), and almost universal literacy. This means China can make that jump, assuming raw materials are available, political stability remains in place and the infrastructure gets built). This is the same formula that Singapore, Japan, Korea and Taiwan all follwed in the past.

Demographics are important, but not everything. The highest labour force increases in the world are in Africa (even with AIDS) and the Middle East (Palestinians in particular but also Saudis, Iraqis, Syrians, Central Asia etc.). Those countries aren't doing particularly well.

Jason, excellent points and no doubt, China will be a force, but will they be "the economic force"? again, I don't think so. There are other social factors at play in that country that we can't fathom as non-Chinese.

I recently read an article from a Chinese author that there is a great deal of concern about morals within China. At the heart of the article was the rapid adoption of Western culture. In summary, there are a couple of growing issues. The gaps between the haves/have nots is becoming larger and larger. Also, the author is concerned that the Chinese are attempting to be western (big car, big house, big display of wealth) and disregarding the base teachings of the Chinese culture. Apparently, this is causing great alarm and a large amount of people are turning to religon to deal with these issues.

Will this affect the growth of China as an economic powerhouse? Hard to say, but I do believe there will be some form of cultural backlash that slows the engine at some point. If I can find the article again, will post it on this comment stream.

Back to the original discussion on the future of the US stock market, I agree that equities will either tank or remain stagnant for a long time (10-20 yrs) until earnings catch up and valuations revert back to their historical mean of around 15x P/E. John Mauldin, a hedge fund manager, makes an excellent case for this in his book "Bulls Eye Investing." He includes this one excellent color-coded matrix that shows stock market returns for every possible combination of holding periods over the past 100 years. Basically, what he illustrates is that rising and falling P/E's have been responsible for most of the gains and losses in the market, as opposed to rising or falling actual underlying earnings. And since 1900, there have been approximately 5 "secular" markets of about 20 yrs each where P/E's were generally rising or falling. Since the early 80's, we've experienced the greatest secular bull market ever, which has now left us w/ the most inflated valuations in history. Thus, there appears to still be plenty of air left in the balloon. When/how will it be let out remains to be seen (either crash or stagnation), but I'm a firm believer that equities (in general) will remain a poor investment vehicle until valuations fall to more reasonable levels.