By John Richardson
Consumers in the West are moving from being ‘cash rich and time poor” to being “cash poor and time rich”.
The reason is that Western fertility rates have below replacement level (2.1 babies/woman) for 45 years since 1970, meaning there are relatively fewer Wealth Creators.
Another problem is the pension pot in the West is only $50,000 – way short of being sufficient to fund periods of retirement that today last 20 years more, thanks to vastly improved life expectancy. The average US corporate pension fund is now only 78% funded due to this increase in life expectancy.
As Bill Gross, the bond guru, pointed out in his October investment newsletter , central bank stimulus has made this hole in pension funding bigger than it would otherwise have been:
Zero bound interest rates destroy the savings function of capitalism….(whilst companies) have ploughed trillions into the financial economy as they buy back their own stock with a seemingly safe tax advantaged arbitrage.
But more importantly, zero destroys existing business models such as life insurance company balance sheets and pension funds, which in turn are expected to use the proceeds to pay benefits for an aging boomer society…..
“Do central bankers not observe that Detroit, Puerto Rico, and soon Chicago, Illinois cannot meet their promised liabilities? Do they simply chalk it up to bad management and inept governance and then return to their Phillips Curves for policy guidance? … The developed world is beginning to run on empty because investments discounted at near zero over the intermediate future cannot provide cash flow or necessary capital gains to pay for past promises in an aging society.
And don’t think that those poor insurance companies and gargantuan pension funds in the hundreds of billions are the only losers. Mainstream Americans with their 401Ks are in a similar pickle. Expecting 8-10% to pay for education, healthcare, retirement or simply taking an accustomed vacation, they won’t be doing much of it as long as short term yields are at zero.
What does this mean for the global chemicals industry and how should your company respond? This is one of the key subjects of a new Study by ICIS Consulting and International eChem.
But in summary here, the headline takeaway of this very long term shift in how Western consumers are behaving will have major consequence for key chemicals end-use markets such as autos, housing and electronics.
In autos instead of replacing your car for the sake of replacing your car every few years, both the old and young will make “the old Volvo” run for many, many extra years with the help of the rise of the 3D printing industry. It will become much easier to print spare parts locally in order to keep old autos on the road.
(Note: Young people will also be affected by ageing populations as the shrinking size of working populations mean less demand for manufactured goods and all their raw materials, and so less economic growth. The young will also face the burden of rising taxes necessary to meet private pension shortfalls and soaring healthcare bills).
In autos, there are three other factors to consider:
1.) Older people drive half the number of miles compared to when they were younger, as their children have left home and they no longer need to drive to work.
2.) Younger people no longer see gaining a driving license as a “rite of passage”, as they can instead communicate with friends via social media.
3.) Volkswagen’s current problems highlight the growing concern over the environmental impact of the auto industry. Disruptive business models such as car-sharing and autonomous cars create further headwinds for future growth.
In housing markets, paradigm shifts are also underway as young people and retirees prefer urban apartments to single family suburban housing for cost and convenience reasons.
Electronics markets are similarly slowing as the smartphone markets becomes saturated. The contrast between Apple’s success and Samsung’s market share collapse highlights how the rise of niche high-price premium brands is being accompanied by ferocious competition for the mass-market from low-cost Chinese brands.
Rising pension shortfalls and shrinking working populations are are also an issue in the emerging world, but require separate examination as the dynamics are somewhat different. This will the subject of my post on Monday.