Global demographic trends point to more Volatility in our Future

by Wayne Ferbert on June 20th, 2012

The most interesting article I read this week was a summary of trends likely to affect the global workforce for the coming two decades. The study was published by McKinsey and summarized on Economist.com. The trends will all have material impacts on the world as we know it - which will influence the investor psyche significantly. I would classify the trends in to three categories: The Obvious, The Interesting, and The Frightening.

 

The Obvious

 

China and India will produce the most new skilled workers in the coming decades. This is like a BGOTO: blinding glimpse of the obvious! China and India are the largest countries by population and growing so fast that this conclusion is fairly obvious. It will be very interesting to see if these countries can invest in their education infrastructure fast enough to give these people the skills they need to drive productivity up.

 

The Interesting

 

The McKinsey team predicts that the growth in the education system and skilled laborers in these two countries will cause a shift in the capital of the world’s innovation centers! Today, that is the United States. In the future, McKinsey predicts that by sheer volume reasons, it will be in China/India. Only time will tell on that one. Innovation is not a numbers game - alone.

 

Also interesting is the likely labor shifts in Europe. Europe is already the slowest growing continent in this study. Its demographic shift will include large flights of population to retirement. The gains needed in productivity in Europe will need to be large to make up for the slow population growth and increase in retirement base. McKinsey predicts a significant investment in automation to improve productivity in Europe. It is an interesting prediction that may have room for investment in firms that specialize in such services.

 

The Frightening

 

The world labor force was 1.7 billion people in 1980 and almost half of them were in farming and agriculture. Today, the world labor force is 2.9 billion – and growing. Needless to say, farming is no longer anywhere near half of the labor force. The growth in population is not really slowing.

 

The world will face a significant shortfall in skilled labor in future decades. In addition, tens of millions of people will be under- and un-employed. The capital that employs will have the upper hand in setting the cost of its employees. The employees will not have negotiating power. Economic inequality is likely to widen its already large chasm based on these trends.

 

The result will be continued labor strife in developing and emerging countries. Labor strife often leads to political strife and regime change. NBC recently reported that by 2020, forecasts show there will be 80 million under- and un-employed men in the Middle East alone. If you think the Arab Spring is likely to subside, think again. That region faces another decade of strife based on these numbers. The number one reason a society overturns its power base is poverty and economic inequality.

 

The investment conclusion

 

Economic inequality will worsen in most overseas countries. In fact, it will likely persist in the US also. Global markets will continue to be volatile as strife persists – mostly strife that is driven by these demographic trends.

 

The US will likely need to deal with its immigration problems sooner rather than later. Many people in the labor force overseas will attempt to migrate to the US in hopes of dealing with the inequality in their own country. But the US will need to be smart about handling immigration – particularly of unskilled labor or it will face similar problems as the countries overseas.

 

The next decade will likely have many highly volatile market moments – which the Buy & Hedge investor will survive with flying colors. Expect more and more strife from overseas to generate this market turmoil. Make sure you are hedged!



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