21st Century Economics

The market demand from the buyers controls the market supply from the sellers. In other words, the seller sells what the buyer is buying. If the demand increases, the supply will expand to meet that demand. There is often a small delay between rapid rises in demand before the supply catches up but this is not of particular importance to large slow swings of market demand as a result of demographic changes. (It can be a factor in fad or impulse marketing, however.)

It is an established fact that people in certain ages of life and career will, on average, buy certain things that are often in common with others in that same age of life or career. For instance, we know that, on average, people buy their first homes between the ages of 25 and 34. Most of this is common sense - you don’t market hearing aids to teenagers or toy dolls to senior citizens. In fact, nearly the entire market of a capitalist economy is based on this concept.

Having established this short list of facts that most of us will agree are intuitively obvious, let’s now look at some additional facts. These are FACTS that can be verified from a number of sources but perhaps the best is the US Census Bureau.

There are 71 million households (76 million people) that can be called part of the Baby Boomers - those born between 1946 and 1964.
An Echo Boom of 64 million people (currently making up 41 million households and growing) are the children of the Baby Boomers - are those born from 1977 to 1993.

Between 1964 and 1977, there was a relatively slow birth rate of 41 million babies.

In the next 50 years (1999 to 2050), the share of the US population age 65 or older will go from 12.5% today to 21% - a 68% rise.
The number of people 85 and older will grow to 19 million from just over 3 million today - a 533% rise.

In 1940, 7% of those 65 are expected to survive to age 90. Today, the figure is 25%. By 2050, 42% of the 65 year olds will survive to age 90. (Believed to be a conservative estimate)

These and other similar statistics make up what we call the demographic economics of the boomers and their effects on our economy. Because so many of us are actually a part of this group, we have not visualized it as an historical or unique event but simply the way life is. If you can step back and see this in perspective to what has happened to world economies in the past and how it will affects us in the future, you begin to see this a much more powerful and predicable series of events. And as you know by now, If you can predict an event, you can profit from it!

Imagine if you had been aware of this situation in the 1950’s - what would have been a good investment? How about everything related to schools? As the bulge in boomers moved from kindergartens, to elementary to high school, the demand for books, clothes, food and schoolteachers expanded to historic highs. Gerber foods, for example, doubled its sales in just two years from 1948 to 1950.

In the 70’s and 80’s, the real estate boom was entirely predicable. You had 76 million people competing for the existing housing and the demand exceed the supply for a long time.

If you had invested in industries that supplied this massive but evolving demand, you could have made a fortune - as many did.

In retrospect, you can see lots of missed opportunities but the nice thing about demographics of this kind is that the opportunities are not over yet. The boomers and echo boomers are still there and still affecting the economy in a very big way.

The massive bull market we have been experiencing is no accident and it surely is not the results of actions by our President or Congress - despite the fact that they try repeatedly to take credit for it. It is because 76 million baby boomers (roughly 27% of the entire US population) have moved into their peak earning and their peak spending years.

Sales of new accounts in mutual funds exceeded $1 billion in a 30 day period in January 1998 for the first time in history. In 1960, there was a total of $640 billion in all mutual funds. Now there is more than $7 trillion. Almost all of that was invested by the boomers during their peak earning years. The early boomers are already moving into the age of retirement. This is why there is now more money in mutual funds and other investments than ever before in history.

But it’s not a totally rosy picture. The boomers will move on to the next stage in life starting in 2007 when the oldest ones begin to reach retirement age. The related changes in their buying and saving habits will have a marked and profound affect on our economy and the world. In fact, it is predicted to be the worse economic period in our history and perhaps for the entire world will follow the boomers into retirement.

21st Century Economics will show you the what’s, why’s and how’s to survive this megatrend and how to profit from it. In fact, if you don’t profit from it, you will be caught in it and suffer significant financial losses and personal hardships. This is not a prediction, it is simply a fact that has not yet happened.

We will be updating this service on a regular basis with new information of what the latest active trends are so that you can get in on the earliest part of the upward turn or get out on the earliest downward turn of a number of specific markets.

Background:

Robotics can be defined as any mechanical device that reduces manual labor by humans. This is obviously a simplistic perspective but it suits the purposes of this discussion. You either have cheap labor or you have expensive labor. If you have cheap labor, you have little incentive to seek out and invest in labor saving devices.

If you have expensive labor, you will seek ways to reduce the costs of the labor. That works fine until all your competitors are do the same thing to reduce labor costs.

You might also find that competition has found a way to reduce its labor costs while maintaining a very high degree of productivity, efficiency and quality. Japan did that in the early 80’s.

In the late 70’s and early 80’s, Japan was faced with a labor shortage, increased competition but a potentially large demand for its cars. To reduce costs, it invested heavily in the development of robotics for many of its auto plants. There are now plants that turn out auto parts hours a day and the entire plant employs 15 or 20 people - to watch the robots.

Japan did the same in the electronics industry. Their products dominate the markets in electronics and have challenged the American auto manufacturers in their own country by keeping quality high and costs low.

When Japan was experiencing their high labor costs, America was in the peak years of the baby boomers moving through their most productive labor years - 16 to 34 years old. All 76 million of them reached that age in the same time. This flood of the labor market held down prices for more than two decades with the effects only just now beginning to subside.

While the labor was cheap in this county, there was no incentive to seek labor saving devices. Even after Japan reduced its labor costs, the US industries did not respond until they began to lose large amounts of market share to Japanese products. Then they sought ways to reduce costs. One of those ways was to begin to move their assembly plants to other locations where labor was very cheap. The thinking was that this was cheaper than what Japan did and it avoided the problems of pollution controls and labor unions.

Unfortunately, a robot that can work 20 hours a day, 7 days a week for little more than a can of oil for pay will never be able to compete with a human worker. US auto makers underestimated the degree of efficiency and quality that a robotic force could apply to the complex assembly of cars and electronics. Despite moving 1000’s of jobs to other countries to reduce labor costs, the US businesses have never been able to compete with the quality and productivity of the Japanese robotic assembly plants.

New Motivator Coming:

American business, on average, has never been particularly smart when it comes to long range strategic planning. They are more driven by the quarterly stockholders reports and the annual fiscal balance sheets to worry about three to ten years away. As a result they almost never invest in the long term strategic development of their industry unless and until motivated by loss of profits.

Despite the massive bull market and the long running market expansion that has been flooding billions of dollars into US business, we are about to head into a much different market that will increase the pressure on many American manufacturers to invest in robotics.

Following the baby boom years of 1946 to 1964, when 76 million babies were born, there was about 13 years of reduced birth rates. In this 13 years, 41 million births occurred or about 45% of the baby boom years.

This baby lull period is now coming into the labor force as the boomers leave. In 1999, they are 22 to 35 years old while the boomers are 35 to 53 years old and beginning to move out of the labor force. By 2007, the boomers had started retiring. The net effect is that the labor force is decreasing by more than 30 million people.

There has also been a shift in attitudes and work ethics of these post-boomer babies. Many of them grew up in schools with computers and many more of them went to college than the boomers did. This effectively reduces the blue collar labor force even more. As with any limited supply, and constant or increasing demand, the cost goes up. Labor rates, as a share of real business costs have risen 45% in the last decade and will continue to rise sharply for the next 7 to 10 years - until the echo boomers (the children of the boomers) enter they work force.

The response to this gradual rise over the past decade has been a gradual rise in capital investment in plants and equipment resulting in a 1997 record high post-WWII investment of 16% of their total economic activity. That percentage will be seen as low by comparison in the next few years.

Robotics to the Rescue

Predictions of what will happen in the future is understandably an inexact science and must be based on a number of inputs from leading industry analyst, current trends and the activities of similar industries and leading edge industry competitors. There are, in fact, often some very predictable results from such studies and an image of the future environment can take on a reasonable form. However, this analysis must be seen as an on-going task since what the industry will become is evolving constantly.

Michael Dertouzos, Director of the Computer Laboratory at the Massachusetts Institute of Technology (MIT), Cambridge offer the following observations as to his expectations of where the IT industry is going in the next twenty to twenty-five years. The statements in italics reflect comments that 21st Century Economics has added based on more recent studies and our own perspective of the world. Our comments have an emphasis on energy and electricity markets because of the importance they play in the overall economy.

Technoprophecy

* Manufacturing will be reborn, as customization replaces the assembly line and local high-tech workshops supplant centralized factories. In fact, “Mass Customization” is a term recently coined to describe the way that manufacturing is doing this now. The centralized factories will survive but with significant computer automation to control the customization processes.

* Business alliances will proliferate, creating hundreds of virtual corporations that may be spread all over the globe. ExtraNets (virtual networks) connecting suppliers to producers and then directly to their customers will evolve in nearly every industry. This will support the growing Internet economy

* Office productivity will increase 200%, yet people will work longer hours with less job security. This prediction is likely now but may prove to be less true after the bulge of the baby boomers mover out of their prime working years. Every job, regardless of the activity, will require computer literacy as a core competency.

* Electronic commerce will greatly reduce the need for any cash transactions. Smart cards, EDI and other on-line transactions will almost eliminate coins and paper currency and make it easier for the government to tax you.

* Your health-care costs will plummet and your health will improve, as computers monitor your vital signs and doctors bid online to care for you. Corporate health care costs will go down while worker health will go up. Preventive care will become a hallmark of both business and the health care industry. Unfortunately, the aging population will probably drive costs to the government to the breaking point and the large excess will be passed to the population as reduced coverage and higher co-payments and premiums.

* Virtual Reality will become the new primary form of entertainment and edutainment. Virtual Reality will also invade routine business communications and advertisements. Look for it to make its first market debut in video games, then in the military and then in marketing. Entertainment will be last because of the changes needed in standards and the costs of the equipment.

“Today we do our office work with just about the same inefficiencies [as] when we dug our streets with our hands. Looming ahead of us in the next century is an incredible opportunity to improve office work, not by 10%, but by a factor of 60 in many instances. Productivity will rise in the Information Age as it did in the Industrial Age and for the same reasons it did before: the application of new tools to relieve human work — more results from less work.”

But he warns of more missteps along the way where ill-advised IT innovations and poor implementations will under-deliver or have a negative effect on productivity. The man-machine interface is on his list as a fundamental challenge that affects the overall impact that IT will have.

The net effect will be that software developers must be much more in tune with the needs of the eventual users. This means that more than just the processing formulas have to be built into the software designs. Usability in the form of intuitive man-machine interfaces, easy to understand instructions and a true customer-oriented approach to the entire development concept must be adopted by every developer - both internal and external to the organization.

Among the effects of these design requirements is that internal IT or IS support departments must add skilled staff that are familiar with requirements analysis, user interface design and creating help or tutorial screens of complex ideas in easy to understand forms.

This report was originally created in July 1999 but is as relevant today as it was then. In fact, most of what it predicted has happened and the opportunities for profits (or not taking large losses) have increased.

What happens to our air is critical to our economy.
If it changes, even slightly, we will feel the financial, health and food effects of it. As a global megatrend, it has far reaching implications on the financial well being of every nation on earth but especially the US. For that reason, it is important to understand the forces at work here.

Life as we know it is possible on Earth because of a natural greenhouse effect that keeps our planet about 60o F warmer than it otherwise would be. Water vapor, carbon dioxide (CO2 ), and other trace gases, such as methane and nitrous oxide, trap solar heat and slow its loss by re-radiation back to space. With industrialization and population growth, greenhouse gas emissions from human activities have consistently increased. These steady additions have begun to tip a delicate balance, significantly increasing the amount of greenhouse gases in the atmosphere, and enhancing their insulating effect.

A wide variety of activities contribute to greenhouse gas emissions.
Burning of coal, oil, and natural gas releases about 6 billion tons of carbon into the atmosphere each year worldwide. Burning and logging of forests contributes another 1-2 billion tons annually by reducing the storage of carbon by trees. The result is that the atmospheric level of CO2, the most important human-derived greenhouse gas, has increased 30 percent, fro m 280 to 360 parts per million (ppm) since 1860. Over the same time period, agricultural and industrial practices have also substantially increased the levels of other potent greenhouse gases — methane concentrations have doubled and nitrous oxide levels have risen by about 15 percent. These gases have atmospheric lifetimes ranging from decades to centuries; today’s emissions will be affecting the climate well into the 21st century.

The overall emissions of greenhouse gases are growing at about 1 percent per year. For millennia, there has been a clear correlation between CO2 levels and the global temperature record. Fluctuations of CO2 and temperature have roughly mirrored each other over the last 160,000 years. The current level of CO2 is already far higher than it has been at any point during this period. If current emissions trends continue over the next century, concentrations will rise to levels not seen on the planet for 50 million years.

Which countries account for the largest proportions of CO2 emissions?
In 1995, 73 percent of the total CO2 emissions from human activities came from the developed countries. The United States is the largest single source, accounting for 22 percent of the total, with carbon emissions per person now exceeding 5 tons per year. Over the next few decades, 90 percent of the world’s population growth will take place in the developing countries, some of which are also undergoing rapid economic development. Per capita energy use in the developing countries, which is currently only 1/10 to 1/20 of the U.S. level, will also increase. If current trends continue, the developing countries will account for more than half of total global CO2 emissions by 2035. China, which is currently the second largest source, is expected to have displaced the United States as the largest emitter by 2015.

Opportunities for Profit

These reports on the megatrend of global warming and ocean rise are not so much meant to present immediate investment opportunities as to alert you to an inevitable trend that will eventually affect all of us. This is not speculation but scientific fact. Unfortunately, it is not in our nature to react ro respond to events that unfold very slowly. Our government and that of many other nations will never put global warming above more immediate issues related to current economic growth and prosperity. For that reason, there will be virtually no preventive measures and no preparation for the eventual effects.

Because there are a few scientists that do understand the coming event and can foresee the impact it will have on society and our economy, they must be silenced so as to not upset the rest of us in our ignorant bliss. To that end, the government will frequently offer up studies that contradict those of established scientists so that the public will remain confused and non-responsive to the warnings. This also allows the government to push off any response until it actually begins to affect our economy - i.e., take money out of the pockets of corporate America - THEN we will address the issues and begin to prepare. Unfortunately, that will be very late in the process and little will be able to be done without major upheavals and deep changes that affect many people.

If a stock is being bought and sold in a thin market the volatility will be large. A thin market is when there are few bids to buy and few offers to sell. This can exist if there is a high demand for the stock but a limited supply of shares. The few trades that do occur in a thin market can affect prices significantly. Institutional investors tend to avoid thin markets because when they buy and sell large blocks of stock, they can significantly affect the stock’s price. They may also find it difficult to get into and out of a position.

If you were to plot beta of a stock over time, you might see changes as the volume of shares in a typical trade fluctuates.

A change from a low beta to a high beta can mean that a thin market has developed for this investment. If the company is buying back its stock or there is a developing takeover in which a buyer is trying to buy up all the shares, the market for this stock will become “thin” and the volatility will increase.

Depending on why this is happening, it can trigger a buy signal for a wise investor.

A change from a high beta to a low beta can indicate that the stock is not seen as being very popular or that is has resolved a major internal problem that has reduced its susceptibility to outside influences. For instance, if an airline is buying fuel on the commodity market, its costs and market position can fluctuate with the price of oil and be influenced by competition with other fuel users - trucks, utilities, heating, manufacturing, etc. This could result in a high beta.