Chief Investment Strategist, The Freeport Society
Make sure there are no kids around when you read this…
China and South Korea are completely and utterly screwed.
As I wrote last month, China’s one-child policy worked. It did exactly what it was designed to do in limiting population growth.
The problem is that it worked a little too well.
China’s population is now shrinking, and the Communist Party of China is losing its mind trying to convince couples to breed again. They know that a shrinking and aging population is not only a slow-motion death for their economy… but it also saps China’s substantial military and diplomatic power.
It appears that using the full power of a totalitarian state to coerce women into having fewer babies was a phenomenally shortsighted idea.
Who knew!
South Korea’s situation is no better, though we can’t really blame heavy-handed government policy for that nation’s demographic woes. No one knows exactly why South Korean women stopped having babies; the reasons are varied and complex.
But stop they did.
The South Korean birth rate is at less than half of what the country needs to maintain a stable population size… and it’s continuing to trend lower. The South Korean military is legitimately concerned its biggest security risk isn’t North Korean missiles… but rather that the country soon won’t have a large enough population to field a viable army.
If either China or South Korea wants to get a glimpse of what is to come, they should start by looking at their island neighbor, Japan.
The Land of the Rising Sun has been dealing with shrinking-population economics since 2008… and with a rapidly aging population since the 1990s.
Consider the following chart compiled by the nonprofit Nippon Communications Foundation.
Not only is Japan’s population shrinking, but it’s also aging rapidly.
Today, nearly 30% of Japanese are 65 or older, well into traditional retirement age. In another 50 years, it’s going to be close to 40% of the population, and that assumes the country continues to take in immigrants, which may or may not come to pass.
So, it should come as no surprise that Japan is a world leader in robotics.
Really… automation via robotics and artificial intelligence is the only viable way to deal with chronic worker shortages in the developed world.
But remember, Homo economicus is more than just a worker drone. He’s also a credit card-swiping consumer. And automation isn’t going to be of much help on that front.
I don’t envision a world in which Terminator cyborgs stop for a latte at Starbucks on the way home.
A shrinking and aging population means fewer people to buy said lattes… or running shoes… or cars… or houses.
How do you grow a modern economy when there are fewer people to sell to with every passing year?
The short answer is you don’t.
As you can see in the chart below, Japan will enjoy a year or two of growth in the 2% to 2.5% range, only to sink back into no growth or even shrinkage immediately after.
Japan’s government isn’t much smarter than our own. They’re prone to doing what governments do, which is spend money they don’t have in the hopes that it kick-starts the economy and gives them the breathing room to figure out a long-term plan later.
Except later never seems to come… and the spending money they don’t have becomes a permanent feature.
Japan’s government debts are now around 220% of GDP. And given that their base of taxpayers gets smaller with every passing year, no one in their right mind believes that debt load will materially shrink let alone actually get paid off.
Look at this chart…
Japan is screwed. Utterly, completely, hopelessly screwed with no way out.
So, what are the takeaways here?
What’s an Investor to Do With This Information?
For starters, steer clear of Japanese bonds and most Japanese stocks, or at least the companies catering to a mostly domestic market.
But even in a slow-motion national catastrophe like Japan, there will be opportunities in the companies catering to the needs of an aging population, such as robots used in nursing and as home assistants.
This theme goes well beyond East Asia, of course.
AI and robotics are being used to alleviate the worker shortage in the United States, too.
Already, Chipotle Mexican Grill Inc. (CMG) is testing robots to make tortilla chips, guacamole, and even burrito bowls.
Secondly, you can also bet on currency devaluation.
The U.S. dollar is a disaster. You know my opinion of the Federal Reserve and its stewardship of the greenback. In case you don’t, it’s all kinds of stuffed up!
But the dollar is hardly uniquely bad. The slow death of the dollar via excessively loose monetary policy and government spending is being mirrored by the yen, the euro, and virtually every other world currency as well.
Protecting ourselves from currency devaluation and actually profiting from it is one of our core strategies at The Freeport Society. In this special presentation, you can learn more about how we’re going about it.
To life, liberty, and the pursuit of wealth.