When I first moved to Calgary to work in the oil and gas industry in early 2006, it was right around the top of the property boom, and affordable housing was next to impossible to find.  Not wanting to shell out half my salary for an apartment, and spending months to fill it up with furniture, I decided to go the room rental route.

Little did we know at the time, but towards the end of 2006, the market was slowly but surely moving from sellers’ to one that favoured buyers.  Ones in the know, i.e. people with family members that dabbled in real estate, already sold in late 2005 or early 2006. But the media and the rest of us general public have always been slow to catch on.  And you wouldn’t know, from the construction buzz around the city, to the countless “For Help” signs hanging haplessly outside shop windows, to stories of McDonald’s and Starbucks paying upward of $14 an hour plus benefits to attract and retain employees.

My second landlord, a sweet spinster in her 60s, believed in the power of real estate as much as she believed in the miracle that is modern medicine.  She credited her various real estate investments for her comfortable lifestyle, despite not having worked out of her home for more than decade.  Her piece of advice to any young-uns that cross her path, is the adage that we should all invest in real estate sooner rather than later.  I can’t blame her or others her generation  for their spectacular confidence in the strength of the housing market.  Their experience of ever-rising property prices facilitated that expectation.  It certainly looked good at the time, with housing prices that doubled within a few years.  Houses that were hardly 1,000 square feet would go for 400,000 to 500,000 dollars in certain parts of the city.  The gains were ludicrous.  And the whole town was drunk on the sudden discovery that, thanks to oil sands in their back yards, a lot of them were paper millionaires!

In early 2007, cracks were already apparent.  One of my bosses bought a yet-to-be-built house on a new lot on a fixed price, while trying to sell her existing dwelling.  Within the span of a couple of months between when her house was valued, and when it went on the market, the price had already dropped by 10,000.  That’s the problem with houses.  You have to live in one. So unless one can capitalize on the gains immediately, and move elsewhere, one only ends up upgrading to an even more over-valued house.  Luckily, the housing boom in Canada, even western Canada, still paled in comparison to what went on in California, the UK, and Spain.  Even the sharpest decline was contained within teen digits.  But for the people that bought into the perpetual rise of property value, is the current market decline a temporary setback, or something that will linger indefinitely?

Jon Carney at Clusterstock seems to favour the latter theory.  From a demographic perspective, this certainly makes sense.

1. Baby-boomers in the US and Europe more or less carried the property markets for the last few decades.  Their continuous demand for housing, whether they be condos, starter-homes, or suburban mansions, drove the market.  As this population ages and trade down, we might se an increase in demand of condos, retirement homes or assisted living complexes, but a drop in market demands for larger homes.

2. Those of us who belong to Gen X or Gen Ys are just not large enough of cohorts to fill the shoes.  There’s the issue of massive student debts, due to the boom and the increasing necessity of acquiring a college education.  Then there’s the shortage of Gen X to move into excess dwellings available on the market.  According to Carney, “only 44 million people were born into Generation X. There are currently 19 million empty homes in the US. That means that if Gen X pairs up through marriages, cohabitation or roommating, they can live in the empty homes without ever buying a new one.”

3. There is compelling evidence that once a bubble bursts, it hardly ever reflates.  The Tulip bubble never came back again, nor did the tech bubble.  So unless the property market can demonstrates and rationalizes rising valuation, it will not climb back to the mid-2000 level.  The public and the media will probably move on to some other new asset class.

4. Inflation or deflation, the property market doesn’t stand a chance.  Should inflation take place from the massive printing job various governments around the world participate in, it can potentially eat up gains made in real estate.  Should deflation becomes the reality, then according to Charles Hugh Smith, “debt grows ever more burdensome as money becomes more valuable and wages and income drop. As a result, assets dependent on debt ( that is, real estate) drop in value. In deflation, real estate become a “capital trap” which loses value as cash gains in value. As incomes plummet, so do rents, i.e. the income stream which real estate earns, further impairing its value.”

5. Low interest lending is gone.  Interest rates will climb higher again, particularly in the US.  The artificial low interest rates can only last as long as the rest of the world had the cash and desire to lend it.  And the spectacular failure that came out of the Democrats’ goodwill to support low-income home ownership will have people questioning the wisdom of policies that justified low interest rates, perhaps even interest deductibility on mortgages that fanned speculation and unaffordable mortgages.  As a side note, Canada does not allow interest deduction, yet home ownership is higher than in the US.  Just saying.

picture source: semideus

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A couple of days ago, a fellow blogger commented on this rather unfortunate Fortune article on his blog.  It is interesting for several reasons.

First, the ideas are cookie-cutter and stale.  Us Gen Yers had been told (to a certain extent) that we were on the cusp of a great demographic shift, where baby boomers’ impending departure would wreak havoc on corporate health.  True, some of us were led to believe that our contribution would be valued at a premium, which would in turn translate into lots of choices and result in us hopping through the corporate environment at break-neck speed.  In reality? Highly unlikely.  The smart ones among us always knew that good jobs are competitive, and supply almost always outstrip demand, especially at the bottom rung. But the media kept up the propaganda – to what end, I don’t know.  Every once in a while, articles like this appear.

Second, the timing is totally off.  Because of economic realities, many boomers simply can’t afford to retire.  More and more Gen Yers find themselves in a much more competitive environment than they were led to believe.  Now everybody is learning to make do with less and to compromise.  Exactly who is out pandering to those misunderstood geniuses, I’m not sure.

The somewhat hilarious prescriptions thrown around by the Fortune writer, and the kick my blogger friend got out of it, reminds me of a book I heard about recently.  In this book, the authors address the various social and consumerist constructions of the Gen Y generation.  I took some notes, here’s a broad overview of the ideas.

School: the obsession with feeling good at all cost

According to the book, the ME culture evolved over several decades, but found its decisive start within the school system.  The baby boomer generation struck out, rejected authority and tried to find its own path.  In their children, they instituted and obsessed over instilling self-esteem.  Subsequently, various forms of formal, or informal self-esteem programs were introduced in school.  They generally aim to make children feel good about themselves at all times and at all cost, with messages like: you are special, you are unique, you are fine just the way you are.

This relentless focus on the self led to some friction as children of those baby-boomers moved through the school system.  In one instance, red pen were deemed too harsh a colour to mark mistakes, so lavender was used instead.  Participation trophies in sports were introduced.

Over time, various institutions have had to deal with this cohort and adjust to its various demands.  In universities, some professors are now faced with complaints when handing out marks: some children and their parents simply would not accept bad ones. In this case, education is viewed as a business transaction, and entitlement rears its ugly head: students are customers of a product, and universities are there to provide it.  Therefore, they feel entitled to walk away with a degree, and a degree with hounours at that.

The road to hell is often paved with good intentions.  Child psychologists now recognize that instead of instilling self-confidence and self-esteem in children, this generational focus on feeling good has created quite the problematic outcome.  The languages and tools used throughout the school system has created an environment where competition is eliminated or downplayed, criticisms are removed when deemed too harsh, children are protected from failures, and as a rule, any kind of output – meaningful or not, is lavished with praise.  In hindsight, this created us: a generation hooked on constant validation and affirmation, perhaps with an unrealistic sense of our own strengths and shortcomings.

The extent to whether the above analysis is in fact accurate, is questionable.  The teachers and lecturers I encountered during my school years were for the most part, fair, constructive, and honest.  But I have noticed the emergence in a brand of bland, neutral and non-critical teachers into the classroom. With various changes taking place in the education system, and more teachers seeing themselves not as teachers but facilitators, what can we expect from the next generation?

The market feeds the beast: unique, customized, and controlled by you

Marketing shifted its focus when it comes to psychological selling.  In the past, the advertising world used to sell based on aspirations.   The marketing message then was: you are not good enough unless you buy our products.  Since nobody will ever be “good enough”, one is left to buy in perpetuity.

That message lost its lustre a while ago.  The message that sells now is something quite different.  Marketers tap into our sense of entailment , our vanity, our need to feel good, and our need for “self-expression” and self-validation through the idea of: you are important, you are unique, you are great the way you are. Now all you need is a product that we have to express your uniqueness.

If we think of some of the most successful products and services to emerge in the past decade, what comes to mind? Facebook, Youtube, IPod, Starbucks.  What do they have in common?  They all capture our need to exert and broadcast our presence, our importance, and our uniqueness to the world.

The trend that pander to the idea of self-expression and self-importance developed when the current Gen Yers were still in their tweens – the term has only been in existence for under two decades.  It was back then marketers first tasted the success of marketing to kids that had their own brand of shampoo.  Since then, that market had been segmented and targeted as one that has the power to make or break products.  I know a little about that.  I still remember the Tomagochi craze and the hand I had played in that hype with my baby alien.

Since then, our generation had not been without this constant bombardment of “uniqueness” marketing.  Marketers are also astute to introduce a sense of “control” back to the consumers: you know better than us, so tell us how and what you want.  Starbucks sells to that – customized coffee experience; burger and sandwich places want to sell you “your” burger or sandwich; cultish spiritual books sell on that – The Secret is to conform the world to your divine force; new condos targeting young urban yuppies – customize your living space by checking a few boxes.

Of course, the true irony of the situation is: the more we buy into the message of customization, the more we are essentially the same.  No matter what colour of IPod we choose, how obscure our coffee order is, or what kind of boxes we tick off when it comes to picking our condo tile or flooring colours, we are buying into the same message of uniqueness.

Arguably one of the most consistently powerful and seductive marketing pitch of our time is one that centres around the idea of: you deserve it.  The L’Oreal commercial and Oprah alike appeal to their audiences this way.  There’s nothing wrong with leading the best life that we can have.  But after years of the same self-congratulatory refrain, we have internalized the idea that luxury is for the masses and not only the rich.  In doing so, we have become accustomed to living the life we want, or “deserve”, rather than the life we can afford.  That sense of entitlement has us hooked on swiping those credit cards.  In one way or another, those self-affirmation and feel-good principles seeded during our school years, carefully nurtured by teachers, parents and marketers alike, came to fruition.

Now, the workplace

The problem gets a little more interesting when my generation enters the workforce.  The old guards are not used to tell us how valuable we are, or hold our hands for constant validation or feedback, or have the patience to listen to our unidirectional broadcast.

All the arguments given above is predicated on the idea that we are indeed a cohort, and this kind of attitude is prevalent in our generation.  In many cases, family influences can trump socialization.  Even so, I have to say that whether I like it or not, my generation probably embodies more Me-ness than generations past.  Whether these are attributable to our age and brashness, or some wider social forces, I cannot be certain.

But the ego-massaging activities the marketing community readily offers is beginning to seem more cynical than clever to me.  If they are indeed fostering a generation that is both insecure and vain, unable to cope with failure and assess ourselves critically and realistically, then perhaps we are better off without them.

A while ago, I looked at some of the worst-hit countries from the global financial storm, and concluded that on a scale of bad to deplorable, the US hardly the worst off. No crystal ball can readily foretell which regions will emerge from the crisis unscathed, but I am bullish on Canada in the medium to long term. Here’s why.

Sounds banks, no bailouts

Some say it was the far-sightedness, wisdom and conservatism that prevented the Canadian banks from participating in the madness that was the sub-prime securitization in the US. Many European banks were not so lucky. Financial institutions from Ireland, England, Iceland, to Belgium and Germany bit off more than they could chew from the “financial innovation” engineered by geeky American capitalists.

In actual fact, it was more likely that the one should credit the particularly Canadian combination of inertia, combined with a dose of cynicism and natural repulsion reserved for those overwhelmingly dominant American business machines, for saving taxpayers from burdens now haunting citizens the world over.

In 2009, the World Economic Forum announced that Canada has the soundest banking system in the world. No small feat, given both the US and many of Europe’s finest had put out their hands to respective governments for help. More embarrassingly, IMF bail-outs and their subsequent belt-tightening policies – previously a last-resort set up to help the undisciplined and “underdeveloped” countries of the world, are forced-fed to some that basked in prosperity only a year ago.

Still sustainable health care, and education system

Rosy picture aside, Canada is hardly immune from the global downturn. In 2008, even perennial winners and long-time economic powerhouses – such as Ontario and Alberta, reported deficits. In a bittersweet historical moment, Ontario got its first ever federal equalization payment this month. Bitter, because the check is usually reserved for Canada’s poorest (have-not) provinces. Sweet, because, well, Ontario cannot complain from never getting anything out of the federal government again.

But that one dark blotch aside, the fabrics that make up the social welfare system of Canada faces no immediate threat. The health care system is still universal and free, save for small and income-tested fees in a few provinces, topping out at a few hundred dollars a year. This is very small compared to what most of the world pays, even the European ones.

As an aside, in the Netherlands, where I am residing now, health insurance is universal and government mandated, but NOT picked up by one’s employer. Nor do employers provide generous dental and other health-related benefits enjoyed by even the most entry-level positions in Canada. An average person pays over 1000 euros a year (yes, still laughable compared to what Americans shell out) for a basic package. More often than not, visits to specialists incur fees that require co-payments. Perversely, I think this kind of system encourages entrepreneurship, since the upside of work is much less attractive without the peripheral benefits.

But back to Canada. Last time I checked, good education is still available at relatively affordable rates compared to most private institutions across the border. Subsidized by taxpayers, Canada’s higher education has yet to grow into the madness that is American tuition fees. Unless one is wealthy or smart, then short of robbing a bank, you are sure to graduate with a mountain of debts. In Canada, by exacting a moderate financial commitment from the students (the average hovers around $5,000 CND a year, excluding books, equipment and living expenses), the government and the public demand reasonable academic and financial discipline. This is a justified and balanced approach. Otherwise, you end up with the western European scenario, where graduating from a bachelor’s degree within its mandated four years is more often an exception rather than the rule, where students (I use that term loosely) still wander around campus in their late 20s, oblivious to the ridiculousness of dragging their studies on for 6 to 10 years.

Got what you need – commodities, agriculture

Like many export-oriented economies, prosperity in Canada depends on the goodwill and continued demand of its products from abroad. For the last couple of decades, the economy has grown increasingly two-pronged.

A common Canadian complaint is the mixed blessing of living next to the world’s most powerful nation, where its mood and appetite need to be carefully monitored and catered to. The Canadian manufacturing industries (particularly those in Ontario and Quebec), its film industry (much of Hollywood production is made in Canada, creating thousands of jobs and millions of dollars for the BC and Ontario economies), and the tourism industry, all depend a good chunk of their yearly revenue on the backs of Americans. In some instances, Canadian businesses closely parallel their American counterpart, none more obvious than the auto industry. America has been, and perhaps will stay the number one destination for Canada’s exports for the near future.

On the other hand, what Canada has stored underground, and what Canada is able to grow, has piqued interest the world over. The three prairie provinces that stretch through much of Canada: Manitoba, Saskatchewan, and Alberta, are fertile farmlands. When the prices of agriculture recover, and they inevitably will, those traditionally sleepy provinces may emerge as the real winners in the coming decades. In other parts of the country, forestry products and base metals abound. As China and India continue their industrialization process, aluminum, copper, gold, iron ore, nickel, uranium will fetch a pretty price yet.

Last but not least, there are the “black gold” of Albertan oil sands. Granted, large-scale operations have all but halted due to the precipitous drop in crude price. But most economists concur that the current price level is 1) temporary, and 2) harmful for long-term oil affordability. In fact, the retrenchment of large-scale drilling and exploration projects lead to an untimely delay to secure future resources. When demand roars back, we’ll get smacked around at the gas pump even worse than the last time.

All this reminds me of two quick stories from my time in Calgary. The first one is the widespread belief that “this time around is different”. Not really, it’s never that different. Calgary went through an oil boom in the 70s, followed by two decades of sluggish growth. When oil price resumed its rise in mid-2000s, people cited the insatiable demands of China’s factories and American consumers as proof that oil had nowhere to go but up and up. This was also the rough line of reasoning that supported the astronomical rise of property prices and the subsequent building boom. At one point in 2007, I could see over half a dozen building cranes from my fifth floor balcony in downtown Calgary. The three corners adjacent to my building were prepared for the erection of luxury condos or office building. The city was untouchable. Things have changed since then. Now all’s quiet on the construction and oil rig front: out of province workers left en-mass beginning of the year. Some never came back after Christmas.

The second one makes me more optimistic on the long-term prospects of the oil sands. Also around 2007, a large Chinese delegation visited the city in an attempt to either buy up a large and well-known oil company or to negotiate some kind of long-term delivery deal. Word on the street: as soon as the Chinese left, the Homeland Security Department landed by helicopter. Escorted by secret service, the top dogs marched straight up the executive suite of the unnamed company, and wagged their fingers. The deal never went through.

Obama can say what he likes about green technology and frowns upon the environmental degradation caused by working with the oil sands. But when push comes to shove, he’ll buy from friends first.  In the least, he won’t let it go to the competition.

Geographic and demographic sustainability

Did you know that in certain parts of Asia (Japan, Hong Kong), the subway employs “pushers”? Those guys make sure as many people as possible get squeezed into subway cars during rush hours. Not the prettiest picture, is it?

Space affects us in more ways than the obvious. Those living in crowded urban spaces have to put up with a level of stress and claustrophobia (or intimacy, take your pick) not known to the suburban dwellers. Unless they commute, that is. In places that embrace a more collectivist culture and can live with some loss of personal space, geographic limitations may in fact facilitate the cultural norm.  Italy, anyone?

But for most parts of the world, individualism is valued at a high cost. For example, property prices and living expenses are consistently the highest in places where land is limited. Japan and parts of Western Europe are in perilous positions. Their limited geography has adverse impacts on everything from their trade dependencies to their immigration policies.

In those parts of the world, demography is not on their side. Their rapidly aging populations run concurrent to declining birth rates, making the sustainability of current taxation and social welfare systems highly questionable. Yet geography (partly) limits immigration. In already crowded places like Japan and the Netherlands, where do you put these new people?

Then I remember that there’s always Canada. With plenty of land, self-sufficient resources, a working immigration policy that ensures the sustainability of social programs and cushions against the damaging effect of an aging population, the future is pretty bright.

picture source: *horstdesign

This is the first real recession for many of us. Some are dealing with the uncertainties by crying foul and uploading blames to all the wrong sources, others are blithely unaware of the seismic shifts taking place right under our noses. Which ones of those trends are long-lasting, and which are merely temporary?

Flirting with frugality

For months, the media has been obsessive in its coverage of America’s new favourite past-time: extreme frugality. It’s one thing to have a subculture of cheapskates planning to save another ten bucks a week in some dark corner of the blogosphere (I know because I am one of those). But it’s entirely another matter to have the Wall Street Journal persuading me from buying a bottle of Evian, so I can save a buck.

With countless individuals and families dealing with foreclosure, many grappling with unemployment, and the millions suffering in silence from a vast amount of their wealth wiped out from a drop in housing prices and stock portfolios, some say that a focus on savings may not be an entirely terrible pursuit.

Certainly, if you are head over heels in debt, and threatened by lay-offs and a drastic change in income, then lifestyle changes must follow. Some consumers are so shell-shocked over the drastic drop in their perceived wealth that they may never recover to join the consumerist party again.

Indeed, America may move away from its previously rampantly materialistic culture of years past to become a more moderate consumerist group. On second thought, I’m not sure I can even believe that. The American Dream of rags to riches will not die. The passionate measures that some Americans have taken to protect and preserve their wealth (of which frugality is a tactic) can only accentuates, instead of diminishing the very American practice of linking success to material possessions. The pursuit of wealth and subsequent accumulation of wealth may be temporarily halted, but centuries of ideals and beliefs do not get erased from the collective psyche just like that.

So to foretell a future peppered with penny-pinching and miser American population is unrealistic. Those trends come in waves. A period of tightening must be followed with a period of letting lose. Once the feelings of desperation become distant memories, debt levels abate, and investment portfolios recuperate to a bearable level, Americans have little reasons to hold back.

The one exception I see in this case is a particular group of baby boomers that are neither nearing retirement, or have already retired. In their cases, massive losses of retirement savings are next to impossible to recover, leading to the next two permanent trends in both the job market and the recreational/travel industries.

Baby boomers holding the fort

If you are a baby boomer nearing retirement, but suddenly finding your nest egg much smaller than you had anticipated, and the value of your number one asset – your property, dropping more than you ever thought possible, what would you do? Instead of sailing into the sunset, you’d probably stick around for a while longer.

It is sad that some members of my parents’ generation cannot proceed according to schedule to enjoy his or her golden years. But the overall ramifications for the wider society might not be all bad. Just a couple of years ago, sociologists and demographers were bemoaning the imminent shortage of workers as waves of baby boomers leave the workforce. This recession has tamed that tide for the time being.

The temporary pause in the mass exodus of medical professionals, and those in the teaching profession, has no doubt allowed alleviated some anxieties. A more measured departure in those seasoned workers may also allow more hand-holding for those taking over the torch. The young ones may want more responsibilities all at once. But from the look of the ongoing debacles, were we really prepared to face it alone?

Business catered to baby boomers: outlook down

During the past few decades, business developers had all but worked themselves into a frenzy to meet the demand from the flood of baby boomers going into retirement. They were supposed to live out their remaining years in beach properties, complete with sun and fun. That meant high-end cruises all around the world, and lots and lots of golf.

Many may still go on to live out this pretty picture. But for the many that had entrusted their retirement portfolio to the wisdom of the buy-and-hold long-term philosophy, the plan is coming up empty. It may take a while yet to see the long-term fallout of such a devastating destruction of wealth for a segment of the population that may never recover. Therefore, those recreational and travel industries catered solely to the baby boomers may want to make slight adjustments to their previously water-tight business models.

Of all the age and demographic groups, I doubt any had suffered a loss as irreparable as the boomers. Knowing this, I find whines and whimpers from the younger generations ignorant and narcissistic. The X and Ys still have many years to build up their damaged portfolios or repair their damaged credit ratings. Because of our later starting points, we should be thankful that a crisis this scale happened this early in our lives and careers. Our career trajectory may be stunted in the short term, but this is hardly an insurmountable barrier.

Alternative career options open up for the young

For the last few decades, banking and finance was king. It still is, in some ways. But the overwhelming pull of the banking industry has undoubtedly waned. Demand for junior bankers are down, and what a favour they are doing for the many burgeoning industries desperately in need of talent!

To some, this is nothing short of emancipation. Previously bound to the competition for the highest post-graduate signing bonuses and compensation packages, many are seeking riches, glory, and satisfaction elsewhere.

Pitting the effect of this new wave of highly ambitious and competitive youngsters (freshly redirected from the financial field) against the larger number of baby boomers holding on to their reigns for longer than previously expected, will a corporate culture clash or bottleneck emerge? Combined with a renewed corporate conservatism getting ready to cloak the business world, are we going to witness a larger number of younger workers turning away from the system not with protests and efforts to steer changes, but with quitting?

There is no shortage of industries in need of innovation. Alternative energy, bio-technology and pharmaceuticals, medical products and services, network and web technologies, are just some of fields always ready for new ideas. Some old ones need help too, newspapers, anybody? The future is hardly bleak for most of us.

picture source: ~FreakyDarlingx

Don Coxe is an investment strategist. But unlike most investment strategists that flaunt degrees in mathematics or quantum physics, Coxe is a curious historian. At 73, his curiosity has yet to wane, and his quarterly newsletter Basic Points has followed him from his old employer BMO to his new investment advisory business.

He makes investment a fun pursuit, not only of numbers, but of knowledge. In his own word, he studies history to “compare popular views about economics, finance, geopolitics with evidence of what has happened in various eras.” And making money is merely a financially rewarding byproduct of that pursuit.

In his March edition of Basic Points, Coxe drew my attention to a few points rarely discussed by investment advisors and analysts in the mainstream. Let’s see what they are.

Lack of sunspot activities and possible crop failures

Most of us are aware that the earth has been warming up in the last couple of centuries. The rise of environmentalism makes sure of that, and Gore’s Inconvenient Truth enforces that belief. As humans, we are no doubt responsible for the unprecedented level of pollution and degradation to our natural habitats. But the feverish pitch of the environmentalists has become dogmatic in recent years, and any dissent over either methodology or the validity of data that supports their belief is deemed treasonous.

As much as environmental awareness is a more than commendable cause, the sensationalism and the selectivity over the type of news and data that make it to the front page has been astounding. Bloopers are swept into the background, and wildly pessimistic and sensationalistic pieces inject more fear and exaggerated claims into mainstream conversations. We are all for a better living environment, but no end justifies the means if facts and truths are misrepresented in the process. The public will turn their backs on the cause, no matter how noble it may be.

But back to the issue on hand for now. With all of that hoopla, you would think that a cooling earth would bring a sigh of relief to the world. But no. According to climatologists, the patterns of the sunspots have been: ten years of sunspot activity, a year of rest, and then a new cycle. The last cycle ended in 2006, and there was little activity in 2007. The troubling thing is that they didn’t appear in 2008, or in 2009 so far. This means that we are experiencing the longest sunspot drought in more than two centuries. Scientists are expecting the sun to resume maximum activity anytime now. But then again, they have been holding their breath with little avail for the past year.

So what does this mean for investors? Coxe thinks if sunspot inactivity continues, we are headed for another year of crop failures and agricultural disaster. He suggests we “watch the websites that update the sunspot story. If the spots don’t return by mid-June, then there might well be great rallies in the grains. Buy the fertilizer, seed and farm equipment stocks.”

And as the unapologetic historian, he leaves us with a requisite tale.

Scotland suffered six straight crop failures during the 1690s because of late Springs and early frosts. Some historians believe this was the major reason why the Scots gave up their dreams of independence and joined England. There were skating parties on the Thames each winter. Polar ice caps expanded dramatically.

Cooling demographics

I have written before on the importance of demographics and the role it played in the ongoing US property bubble. Demographics also played a part in preventing the much anticipated Japanese economic recovery from taking place in the last decade, as well as stopping the Europeans short from writing a large stimulus check.

Don Coxe’s analysis further affirms my belief that many OECD countries face similar challenges to Japan in the coming years. In his opinion, rising standard of living and property prices took place on the back of a population boom. When this came to a sudden halt in the 70s, residential real estate is a reliable long-term asset class no more.

When the overwhelming majority of families in the OECD collectively and simultaneously chose to cease reproducing themselves in the early 1970s, and stuck to that resolution, they repealed the most basic of long-term investment concepts. Demographers and social scientists can debate the reasons behind this momentous behaviour shift – or even whether it is a good thing. We merely note the obvious, that financial prognosticators have no: people changed 35 years ago – apparently permanently – and the world changed – apparently permanently.

What began during the early 1970s was an OECD-wide collapse in the fertility rate from roughly 2.4-2.5 babies per female to 1.4 babies. Since 2.1 is required to maintain population levels, the three decades of fertility below 1.6 have, slowly but inexorably, transformed population profiles – and the housing markets.

He also goes on to spell out the corruption that went on at Fannie and Freddie that could not have existed without full backing and co-operation of the government, particularly the Democrats. Bottom line? Political leadership is as much to blame as the corporate fat cats they have been hanging out to dry the past year.

The government’s relentless pursuit of property ownership expansion ignored the basic supply and demand equation in the market place. None of the reckless lenders in the housing market noticed the reason for debasing lending criteria to expand the supply of qualified homebuyers was the dwindling number of qualified homebuyers.

While the Congress was busy enabling lenders to sign unaffordable mortgages over to poor Latinos and African-Americans, it heavy-handedly restricted the supply of working-visas and green cards to more productive, better-educated, willing and able receivers of properties. The result? The people that could have purchased and sustained a rising housing market were denied access, where those that could not afford to service the mortgages were burdened with incomprehensibly termed debts.

picture source: ~MichaelBills

This is part two of a two part post on the importance of demographics on one’s investment choices.  Part one addresses the perils of neglecting demographics, and today’s post will discuss investment ideas backed up by demographic trends.

The more sensible consumer mentality may also be applied to investments. For years, we have invested in trends that most people do not understand – many had little fundamental support behind it other than the sheer force of market momentum. The foolishness of that collective decision is reflected in overall market returns: during the past decade, the stock market has not treated us well.

Perhaps it’s time to look at investments that have the solid support of demographics and real demand behind it? Is it any surprise that during this crisis, Best Buy is down 47% and Family Dollar Stores are up 30%? Before the fundamental disarrays of the economy are addressed, it’s safe to say that products and services that meet essential needs will stick around. On a side note, would it also make a lot of sense to retrain those laid-off workers from the previous fluff economy in those fields that have long-term demands? Now going back to the idea of ongoing demands, here are some thoughts.

Follow the demands of the aging population and pay attention to healthcare related companies not run by crooks. In most of the developed countries, healthcare needs are hardly abating. The demands for various levels of medical care in the forms of doctors, nurses, medication, medical equipments, and assisted living will continue to rise every year. Yet the broken Medicare system in the US, along with issues of patents, the emergence of scandals and ethics quandaries related to the pharmaceutical industries, have tainted the industry reputation and sidetracked the dire issue on hand. But with pressing demands that will continue rising with time, it is an industry that demographers would pay close attention to.

As the most dependent existing source of energy, oil will not stay double digits for long. The financial crisis has all but rendered the discussion of oil price obsolete. But reality remains that once we pull out of this recession, the competition for oil will resume at an ever-furious pace. The Americans still need to drive, and the Chinese still need to run their factories. The fundamental demand equation has not changed. The recession compounds the supply problem, as lack of credit and falling oil price has lead to many downstream oil drillers to halt operations. Macroeconomic uncertainties, crude price fluctuations and its consequently low break-even number have driven small and large operations to abandon exploration activities. Similar to the agriculture market, once demand picks up again, oil price will come back with a vengeance.

A corollary to the last point, alternative energy has no choice but to step up. Oil is a dwindling resource. So whichever way we spin it, this stuff is going to run out. And most likely sooner than we would like. At times of high oil prices and tight supply, R&D of alternative energy gets a boost. Now with oil at a fraction of what it was a year ago, the government and the general public has turned its focus on fixing more immediate malaises of the economy. Renewable energy talks are taking a backseat. But the issue of energy sustainability remains, and the solution rests with alternative energy. With employments in real estate and car manufacturing collapsing in the US, it would make a lot of sense for some of the newly unemployed to retrain themselves in, say, alternative energy engineering? This business will be around for the foreseeable future.

Invest in what “they” need. Many say that China and India will be the largest consumers in the 21^st century. Given the American and Japanese experiences with consumerism, I’m not sure that’s something they would want for themselves. But remember our truism about wants versus needs, and focus on giving them what they need.

Off the bat, food related products including wheat, rice, beans, dairy, meats are essential. Rising living standards demands better food. These foods must come from limited farming regions. Agriculture is one of the most neglected industries in the past two decades. So invest in agriculture. This might sound slightly exaggerated: but who knows, maybe farmers will drive Lamborghinis in the future, not brokers.

Farming aside, industrial materials are also needed to meet the ongoing demands of industrialization in those parts of the world. All classes of commodities will be in short supply, so the temporary slump in commodity prices is just waiting for a jumpstart for another upward trajectory. Some are already taking advantage of low prices by stockpiling them. Too bad the needs are ongoing, and demands will still be there when the market turns the corner. It’s safe to say that businesses positioned to sell to countries like China and India are those that will succeed in the 21^st century.

Water is another over-looked group. Farming, industrialization, urbanization, and improving living standards have led to a shortage of water in China and an even more serious shortage of clean drinking water. Water supply and conservation, purification, sewage treatment, industrial bleaching, there are so many needs that the government can’t keep up. Expertise in how to do one or all of the above in ways that are safer, more efficient, less costly, and less environmentally disruptive, will also find itself highly sought after.

picture source: ~avotius

ddresses

This is a two-part article that addresses economic and investment implications of demographic trends. Today, I look at what happens when we ignore demographics. In tomorrow’s column, I look at some investment opportunities supported by population and demand trends.

I still remember presenting David Foot’s book “Boom, Bust, and Echo” in my high school economics class. It was the first time I was exposed to the idea. It was clear, succinct, and for me, absolutely mind-blowing (I was 17, ok?). Its sociological, marketing, economic and political implications kept me engaged and excited for weeks leading up to my talk. I still remember feeling exasperated at not being able to present the explanatory power of this concept within an hour of allotted time. This was before Powerpoint came along to provide structural assistance and graphics entertainment. So God bless my fellow classmates for sitting through the hour of what must’ve been an excruciatingly boring experience: me, with questionable level of articulateness, wildly gesticulating with my right hand, while waving pages of notes with my left.

It’s been a while since high school, and the over-use and abuse of the term has since left me disillusioned with its clairvoyance. The rest of the world must have discovered the magical potential of a concept that is always readily available to provide digestible explanations for, well, everything.

When I worked in the oil boom town of Calgary in western Canada, any high school drop-out rig worker or administrative assistant, when asked about the sustainability of sky-rocket crude prices, would shrug their shoulders and say: it’s China and India, they need oil, it’s all about demographics. The same line of reasoning was used to explain the rise of food prices last year: developing countries are getting richer and eating better, there’s an increase in demand, again, it’s demographics. The same explanation sufficed for the bio-tech and pharmaceutical stock rally every few years: the baby boomers, they’re getting older and need medication, it’s demographics!

Then the oil boom ended, the food crisis abated, and has anyone heard anything about the explosive growth of the pharmaceutical industry lately? For a while, demographics became a mere pop-cultural sound bite: a convenient simplification of complex problems. The flagrant abuse of the term, combined with its questionable predictive powers, led me to more or less abandon my earlier enthusiasm.

Lately, the idea of demographics has returned in a slightly different incarnation. As frivolous as some broad-brush generalizations of this concept can be, I found numerous instances of past disaster and future opportunities off the backs of demographics. I’m now convinced that demographics is still a credible tool, but only when paired with common sense. Here’s an example of what happens when we desert demographics and common sense.

Demographics and housing prices

One school of thought that addresses the “irrational exuberance” of the property bubble is this. There was no underlying demographic trend that supported the astronomical rise in housing prices. The population demographics signaled no spike or increase in the demand for real estate.

In fact, some argue that housing prices moved up over the past half century because of the steady progression of baby boomers through various ladders of the property market. This growth has all but halted during the past decade. Population growth has not been large enough to justify price inflation in the hot zones, even if one takes into account the emergence of Gen X and immigrants as property buyers. From a demographics perspective, once the boomers’ needs are met, realistically, the market should have plateau and flatten out, if not trending down. Given some members of the baby boomers have already entered retirement, thus further reducing the demand for housing, it’s reasonable to deduce that the pattern over the past fifty years cannot be extrapolated infinitely into the future. By that measure alone, the idea that real estate prices will never go down was plain wrong.

Just to show that demographics analysis only work in conjunction with good sense, you can also make an opposite case given the same numbers, or with a different set. You can also confuse your readers by throwing around the terms “demographics” and “baby boomers” that neither support nor refute your point.

Employment based on a false boom

What are the employment implications of the housing bubble? Here’s one scary statistic: 30% of job creations in California since 2000 had been in real estate related fields, i.e. real estate agents, construction, Home Depot, insurance brokers, mortgage brokers, stock brokers investment banking, etc. Suffice to say, originally created to sustain and support a castle in the sky, once the delusion ends, these jobs are not coming back anytime soon. The re-education and the re-absorption of the unemployed back into the economy is an interesting phenomenon to watch. Many are going back to community colleges in the fields of nursing, engineering, or accounting: fields that have high demographic demands going forward, and will be discussed in tomorrow’s column.

Output outpaces spending, a new paradigm?

The whole world is in recession, but there are two kinds of recession. Export-led economies such as Germany, China and Japan are facing a recession of the real economy, whereas the US, UK, and Iceland, are facing problems in its financial economy.

It might be a good time to acknowledge how a large number of western countries had been able to sustain its growth and wealth accumulation despite a lackluster real value-generating economy. Let’s not forget how the U.S. was able to grow during the last couple of decades: for the most part, businesses and individuals borrowed to invest in over-inflated assets, whether they were tech stocks or bundled housing assets.

Now the bubble has burst again. Is it time to re-examine the issue of value creation as a sustainable path for growth? With the downfall of Detroit and Wall Street, where do we turn to next? What will we invest in going forward?

First, turn on our protective coping mechanism. Many are dealing with the uncertainties and financial challenges of this crisis by doing what our ancestors must have done for thousands of years: by paring our needs down to what is absolutely necessary. Gone are the days for designer clothes and barely used appliances piling up in a 3-car garage.

This new consumer behaviour is duly reflected in the game of retail survival. Sellers of inessential goods and services are either doing badly or going out of business altogether; where retailers of basic necessities are going strong.

Of course, we are doing this in face of economic hardship. Nobody in their right mind would prefer to forego Starbucks or trading in Chanel for Wal-Mart. It is not the American way. But if structural adjustment of the economy is allowed to continue, and people are forced to stop buying thing they don’t need with credit that they don’t have, then perhaps the not-so-subtle shift towards a more frugal mentality will take permanent hold.

Perhaps our investment choices in the future will follow a similar trajectory as our  consumption behaviour, and more merits will be given to businesses that satisfy the needs and necessities, versus the wants, of our global society?

In tomorrow’s column, I’ll discuss my thoughts on some investment ideas that are driven and supported by demographic trends.

picture source: boobookitty