Population and Destiny

So land banking is back then?

That's one way of viewing the $1.2 billin bid by Canada's Agrium for wheat exporter AWB. Agrium is offering a 57% premium to AWB's share-price before the mooted merger with Grain Corp. Maybe the cashed-up Canadians are taking advantage of a beaten-down share (RSPT and litigation related). But it's obvious that arable land and food is compelling investment.

The nice thing about food is that you can eat it. The same can't be said for government bonds or, to be fair, gold. This may explain the appetite of Canadian companies for Austrlian agricultural assets. Acccording to today's AFR, over $6 billion has been, "thrown at Australian agricultur acquisitions in the past year." Last year Canada's Viterra paid $1.6 billion for South Australian ABB Grain.

While specific agricultural equities in Australia are difficult to value because of the variability of global commodity prices, the general trade is pretty simple as a concept: buy food. And you dont' get more tangible, as an asset class, than land. This is one reason why earlier this year we suggested buying companies sitting on large deposits of unused, unextrated commodities that might be key to a post-deflationary, post hyper-inflationary meltdown.

Speaking of tangible assets, gold futures hit a six-week high overnight. They've since retreated. But it's a strange old world. The news that Japan's annualised GDP grew at just 0.4% was enough to give investors a major case of cold feet. They bought Treasuries. Some of them bought gold.

It shouldn't surprise anyone that Japan is not growing like gangbusters. Demographically speaking, it's not a young country anymore. This is one reason why Japanese stocks have never fully recovered from the 1989 crash and another reason why Japan's public-debt-to-GDP ratio has been sustainably high. Japanese savers have been content to fund domestic government deficits because they prefer the safety of bonds to taking risks in the stock market.

As you can see from the population pyramid of Japan (see charts below) it's relatively top-heavy. That means Japan has a large percentage of its population at or near retirement age. To the extent that "demographics is destiny' - demographic trends drive consumer spending and corporate earnings and/or indicate the coming strain on government financiers - Japan doesn't look like much of a growth stock.

And now - why'll we're anticipating and preparing for the next great U.S. dollar crisis - we'll pause in our regular reckoning to look at a few of the population pyramids that struck our fancy. The question, posed by a long-suffering reader, is whether Australia faces a lot of long-term negatives because it shares the same demographic profile as Japan or the nation's of Western Europe. Before we answer that, let's look at the population pyramids we selected from here. As a reminder, they show you the distribution of the population in terms of age.

What have we learned?

Japan and Italy have ageing populations. Through either low immigration or low birth rates, or a combination of both, ageing countries face some grim demographic math. Pension (private and public) pensions are likely to increase even as the tax base shrinks. Taxes go up on younger people. But government borrowing probably increases too, unless benefits get cut. If the borrowing is not from domestic savings (where it would then NOT go to private enterprise) it must be done on global markets at whatever the market price for money is.

Iran is very young, but ruled by theocratic old men. Hmmn.

The U.S. has a squarish figure. But the pyramid does not reveal that for most American workers, real wages have gone nowhere since 1974. The boomers might be able to retire by liquidating their share market and housing wealth. But who are they going to sell to? The government?

Australia looks surprisingly curvy, which reveals something demographically unusual. Australia's GenX generation is actually larger than its Baby Boomer generation. Hmmn.

The Boomer in both parties are promising the sky to themselves and Gen Y and the Millennials. Who's going to pay for it? The Xers that run small businesses and are in the prime of their wage earning years. Give them they yoke. There are future fields to plough!

It will be interesting to see how the votes breakdown over the weekend. As an Xer, but not an Australian citizen, your editor remembers recessions and his first job (as a 12-year old bus boy in a restaurant owned by a friend's dad). We generally reject most stereotypes. But we do find most Xers to be suspicious of or at least not expect a lot of government. However, government may be expecting a lot of all of us!

What can you take away from Australia's demographic chart? Given that there is no immediate funding crisis for social welfare, it's going to be pretty easy to convince Aussie investors to invest in government bonds as an alternative to shares. It might even be mandated that popular investment vehicles are required to own "safe" government bonds and thus, directly fund deficit spending for years to come.

Dan Denning
for The Daily Reckoning Australia

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