What's on Your Mind: Demographics

[00:00:00] Hey Justin, how are you? I'm doing well, Ram, how are you? Good. Week flew by, that was a fast one. Yes, with two snow days for my kids and a Monday holiday. It was a very, yeah, quick week in some regards and slow in others. That it was. So we had a fun chat earlier today with the authors of this book, The Great Demographic Reversal.

So I would recommend folks check it out when I think about the long term structural changes. And what stuck out for me was How demographics are driving not just inflation, but also interest rates, earnings growth, and fiscal spending, namely entitlement programs and the worker to retiree ratio. It is such, we always knew demographics were a big deal.

We always, we say demographics are [00:01:00] destiny, but it really is driving four most foundational levers that drive investment performance. And it's a big deal, demographics. Yeah, it's really interesting to think about the labor pool and how that changing labor pool over time impacts these issues.

That's really part of the demographics at one stage, and then at another, it's this entitlement question and cost of. Supporting that segment of the population as they age. I thought another, I don't, element that stuck out is when he said the fastest growing cohort within the population is the oldest of the oldest.

Yes, exactly. Oldest of the oldest. Now that's where healthspan comes in, right? Because I've been talking with a lot of folks and they're all trying to say round off the curve. They want to live as long as possible, [00:02:00] but then when they have no healthspan left. And it and that's the difference between somebody who has that capability and somebody who has longevity, but a low health span is all where that long tail cost is, I don't remember the statistic, but I know that it was a super majority of your lifetime spend on healthcare is likely in your last few years.

Yeah, I agree. There's a lot going on here and that, the political tensions around demographics are only going to get worse. Because you have intergenerational issues, you have immigration policy questions and issues, you have pressures on wages, you have tensions between owners of capital and providers of labor.

Savers and retirees, Fed, it's a mess. It's a mess. And the other takeaway is policymakers have never lived through this and politicians are kicking the can. They're not going to have the hard conversations, not going to address the issues. So there will be more [00:03:00] volatility ahead. And how you position for that next 10 and really 20 and 30 and 40 years isn't, is one of the most critical questions that everyone should be asking.

And no one really. Is they have a coffee shop. They're not really saying, what does this mean for how do I invest? Yeah, no, it's really interesting, but I think another factor we're talking about. birth rates, fertility, and like the demographic trend, right? In our country, and maybe in many others, there's a spike, maybe the baby boomer generation, right?

And I think some view that there's been, oh, that was this one time and now birth rates are falling, but the data that I've seen shows that birth rates were falling well before the baby boomer generation. That was like an aberrant spike. [00:04:00] 10. Thank you. It's continuing down for the United States. So fascinating, which makes sense as we move away from an agrarian economy, which was started at 1900 at one and two Americans was a farmer.

You need hands to work the field and it's modern technology and specialization. You just don't need that anymore. That's exactly right. And so we're living through this moment where it hasn't reset. All right, like a hundred years from now, this may not be an issue because you may not have like a ballooning generation of the oldest old.

You'll have different problems, of course, but we're in this magic period where we had this rise in productivity and they talked about China and the growing demographics and the baby boomer generation working consuming in a deflationary economy. Now, it's all ending, the magic carpet ride has ended.

And he also, they also said that China's already [00:05:00] shrinking. It's not a forecast. Year over year, China's shrinking now. It's happening. It's we asked them about their views on interest rates, that's gonna go up, inflation, hard to keep low pressure's there, and we asked them how they would consider positioning now these are macro people, it's very high level ideas, not Very tactical, which is where we believe the value is.

You got to really go deeper there. But they were talking about inflation linked bonds. They expected the equity risk premium to go up. It's another way of saying that equity would be valued less and bonds be valued less. Let's say essentially they're saying is there's a markdown on the valuation of assets overall.

It was a very sobering both these two worked out Morgan Stanley we'll hold that against them. One is a retired emeritus professor at London school of economics and The other one's a macro, policy or the credible people again, they published before the non consensus view, but they did, I thought, identify the trade off that policymakers have, [00:06:00] and it's a, there are no good choices, no unless you get the AI productivity bailout, and the issue with the AI productivity bailout is it doesn't provide services We're the elderly or the young, which is what you really need.

Robots with empathy. We don't have that. Yeah. So let's unpack a couple of those issues and talk about that. So let's talk about AI first. So the hope is not a plan, but they talked about politicians are just hopeful that there's this productivity boon they've happened in the past. Maybe AI will be it.

But your point. Is that the most in demand jobs will not be beneficiaries of direct AI impact. It's not going to create more or better nurses necessarily, or home health care aides, or preschool teachers or things like that. E com fulfillment doesn't [00:07:00] help us. Maybe it frees up labor to go to those jobs, right?

Is that. The way to think through the possible way AI can impact white collar jobs, not blue collar jobs. You need more blue collar jobs. You need more service jobs, service economy. It's not an easy, it's not an easy transition. It's not a It'll be messy. Yeah, it will be. Automated driving is one of those things where it's always been around the horizon, but if it does come, that really does displace a lot of jobs, which, is really difficult in the short run.

You think the gig economy is not enough? The gig economy is not enough. No, I'm thinking of look, commercial truck drivers, UPS driver. That's a lot of people that. Yeah.

We'll see, who knows. But then the other [00:08:00] side to unpack is, what about politicians? What would be your policy solution, if you could implement any policy solution? Okay, it's hard questions, and I haven't thought hard about it. And I'm probably going to be wrong, not probably, I will be wrong what I say, I'm probably going to change my mind in a few months.

Here's what I would do. One, entitlement reform. How do you do that? Means test, you have to means test. That means that if you generate income above a certain level, then you're not going to qualify for benefits. I don't assume I get any security benefits. I assume they're worth a zero. Okay? Just price that in.

Make that a zero. I think that happened. We'll adjust, but that should be paired with something else. For example, maybe I shouldn't have to pay into the social security trust fund. Maybe I can manage my own wealth because I'm an accredited investor or something that, there should be some kind of carrot there, so that's one second, you got to cut spending quite the heart. That's the easy statement to say. The question is where we talked about entitlement. That's the big [00:09:00] driver. Uh, I think the focus is on the big driver. It's entitlements. Then the third is, you need to improve your demographic story.

The best performing stock markets in the world are the United States, India, and Mexico. And they have a better demographic profile than the worst stock markets in the world, which are China and Europe. I don't think that's a coincidence. That's structural in nature. And here's another fun fact. Countries that have higher demographic population growth rates also have higher performing stock markets.

That's right. So China's interesting as like a tactical trade. I don't, it's not like a, if you can find an exporter there that's exporting to growing economy, that's a bit of a different situation. But, you know, it's like a, if you think about China as a business, it really is like in this decline, they can't arguably catch up with [00:10:00] living standards now like that.

That's out the door now. So yeah, the policy questions are not easy. They need to happen. And then the harder parts are around do you accept a higher inflation rate, which they're getting at? And their point is look. If you if you try to win the battle on inflation, then you're going to have higher interest rates, which also mean higher deficits.

Net service costs. Correct. So something, and that means you've got to cut more expenses. It's very difficult challenge. We really need. a Manhattan project for AI and robotics. That's the only bailout that it's the only solution that has no trade off other than the investment itself.

Wow. Other than the one trade off would be that AGI goes rogue. That solves our problems anyway and then we don't have to worry about it. It's AI, bro. We gotta pick our poison. So I thought how to position was interesting. They're long [00:11:00] wheelchairs. I think this is where we can add a lot more value and perspective.

It's our job to do that. How to maneuver. But one is I don't get why people own bonds. I don't get why people own treasuries. Don't get why people own TLT. Didn't make any sense. Then last year, it doesn't make sense. Now that rings true. doubly with all of this, if rates are going higher, inflation is more persistent.

What are you owning a bond for? The better opportunities and alternatives bonds, for sure. And then the other is long semiconductors, NVIDIA, again, leading today. It's a leader within semiconductors. It's been our thesis and theme, but that's the way to bet on AI for now. The CAPEX receiver layer, the market is assigning leadership to semiconductors.

We've been all over that. So I think more of that, because that's the driver of the productivity boom, the bailout and you got government spend there. So that's one. The other is nursing homes, long nursing homes, small cap, there are small cap nursing homes, good businesses with good prices. That trend is going to keep growing.

That's an annuity [00:12:00] business. Biotech and pharma and new modalities and new treatments. We talked about treatments for Alzheimer's and I thought they made a great point that a lot of the biotech and pharma focus has been on the primary drivers of mortality, like cardiovascular disease and cancer, which makes sense.

We want to focus on the primary drivers of death, but if we can enhance lifespan, our health span to your earlier point through improving mental function and addressing cognitive decline. Like Alzheimer treatment, like that matters because of these issues, because if you can live longer and be more productive in the last 10 to 15 years, then the elderly population doesn't go from being a tax on the system, but being a driver.

Productivity. I thought that was an excellent point. And there are some technologies in biotech that are getting past phase two trials. There's some problems, like a lot of false starts around Alzheimer's and Parkinson's, but there are, and that's why we [00:13:00] like bio, we're overweight biotech.

So I think our themes are actually well aligned with the demographics. I also think the hard question is growth stocks versus value stacks and how to position within both of those. That's a really interesting question. It's true. It gets very complicated and the political solutions are. Yeah, typical. Do you have a view, do you have a, I know we're going to wrap up in a moment.

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