Investing with the few.

AuthorHokenson, Richard F.
PositionFinancial executives and investment management - Cover Story

Is the United States heading for Japan's economic fate? The road is paved with vacant office buildings, trade-up houses - and tough investment questions.

As a financial executive, you now are making investment decisions in a world that's fundamentally and structurally different from any of the past. Why? Because the group of people born in the United States between 1945 and the mid-1960s - the baby-boom generation - has made an unprecedented decision: It's the first generation to voluntarily not replace itself in the population pool.

We've set in motion the aging of the population. But we'll not only see more old - we'll see a decline in the number of young. What does that mean? Everyone who's managing money in an already developed country, whether it's in Europe, North America or Japan, faces the following quandary: how to make investments in an economy with low and declining interest rates. I believe in less than two years the yield on a U.S. long-term treasury will be at 4 percent or slightly above, then it will move into the 3-percent range.

Why have the basic growth dynamics of nearly every industrialized country changed so radically in the 1990s? Why do so many countries have unusually lengthy recessions? Why are the recoveries in those economies very different from what we've seen in the past?

The aging, trading baby boomers essentially drive nothing. They have their inventory of stuff, and most of it's good enough. What wears out they replace. They swap one car for another or one house for another. Few own more than one large, expensive durable good. Very few households have more cars than they have drivers. Very few families own more than one house. The only time the baby boomers have an impact on the growth rate of the economy is when they trade. And even if they trade up in value, the trade is relatively small.

On the other hand, young adults drive economic growth. They leave their parents' home, where they shared goods and services, to accumulate their own consumer goods and begin another household life cycle.

European and Japanese economies face this same demographic reality. For instance, when Great Britain dropped out of the exchange-rate mechanism four years ago - devaluing the pound and thus lowering the prices of imported goods - what was the standard economic forecast for the United Kingdom? Economists warned it would end up with a current account deficit, rising inflation and rising interest rates. What does it have four years later? A current account surplus, falling inflation and falling interest rates.

In the 1960s and 1970s, the United Kingdom had lots of young people, who used the change in prices to increase the demand for imported consumer goods. In the 1990s, the young people aren't there. If the price of televisions falls 10 percent or 15 percent, that's not a signal to baby boomers to buy another; they already have their inventory of goods.

We're clearly looking at long-run excess capacity in consumer goods' production and distribution. We spend less because we consume less. Given this picture, the country at the biggest disadvantage is Japan.

What does Japan make? Big-ticket consumer goods. As long as Japan had baby boomers in the already-industrialized West reaching adulthood, it had a rapidly growing market. But that market is now in a decline. While there is indeed a rising international demand for electronic products - Japan's manufacturing forte - it's not at Japan's price points. A...

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