The Boom, Bust, and Echo Economy:

Investor Canada speaks with David Foot

This is a transcript of a radio interview.

Interviewer: Layth Matthews

North America has the best demographic profile in the world over the next ten years says Boom, Bust & Echo Demographics Author David Foot

IC: Today it is my pleasure to be speaking with Dr. David Foot, who is a professor of Economics at University of Toronto and Co-author of several best-selling books, including most recently ďBoom, Bust and Echo, profiting from the demographic shift in the 21st Century.Ē Welcome David.

Foot: Thank you Layth. Nice to be with you again.

IC: David, how about a brief overview of the forecasting track record of demographics?

Foot: Well I think it has a pretty good track record but I think you have to be very careful to understand that in the short-term if you are thinking of the next month or even the next year, the state of the economy is much more important.

But if you are thinking out three, five, ten years, increasingly, demographics becomes the driver of most of the trends around us. It is not the only driver as I often argue. Demographics is two thirds of everything and obviously globalization and technology also have a role to play in the medium term outlook.

IC: Now we really want your opinion on the current state of affairs but maybe you could give us a little background on how you look at the various groups by demographic analysis?

Foot: Well the title of the book, ďBoom, Bust and EchoĒ comes from the three main groups. The two big movements if we like. The Boom comes from the Boomer Generation, born in the post-war period. So the number of births started up dramatically around 1946 in the US, 1947 in Canada. And so those people are now in their early 50s.

And so there is huge growth of products and services that people in their 50s will need and a little example is that on average you become a grandparent for the first time at age 53. So there are going to be exploding numbers of grandparents out there with all the things that go along with that.

Then the introduction of the birth control pill in the early 60s and by the mid 60s births had really started to plummet and hardly anyone was born over the late 60s and 70s. That means there is hardly any twenty-somethings out there today to do the entry-level positions.

And that is why the unemployment rate came down and that is why ďhelp wantedĒ signs started to appear in our economy, both north and south of the border. And then over the 80s the boomers had their kids and they are now teenagers and this is why movie attendance is going up and now births are going down and that is why we are beginning to have to close elementary schools again.

So boom, bust, echo, bust, that profile every year getting a year older has major implications on our society and on our businesses.

IC: So there was kind of a gap in the birth rate in the last 60s and on some level when the birth rate is relatively low, that kind of bodes well for the people born during that period of time?

Foot: Yes, if you were born in the 70s, as I say, 1975, hardly anyone was born in 1975 for example. You are now twenty-five, twenty-six and that means you donít have any competition in your age group.

And so while you donít have very much impact on the marketplace, the marketplace tends to ignore you a bit because you are not a big group of consumers, the advantage of that on the other side of it is that you donít have a lot of competition within your age group for other people looking for jobs.

So it is beneficial in the sense that you donít have to compete for jobs nearly so intensively. It is not beneficial in the sense that you are a small group and therefore the marketplace may ignore you.

IC: Now how about some of the other groups in different ages? Any other groups that stand out?

Foot: Well the Echo kids, particularly in the United States. The Echo is quite large. There are 79 million Boomers, 76 million Echo kids in the United States. So it is almost as big as the boom. As a percentage of the population of course, it doesnít have the same impact that the Boom did in the 1950s and early 60s.

But quantitatively it is almost the same size. Increasingly Hispanic, of course. And that means there are lots of teenagers out there to market to in the US. There are not many teenagers in New Brunswick I might add so the sort of strategies that you might want to adopt in California like building mega movie complexes are not the sort of the strategies you want to export to the older regions of North American like New Brunswick or Nova Scotia.

But the point here is there are lots of teenagers and these teenagers will be entering the workforce over the next decade. So the idea that we are going to have continued labour market shortages is a whole lot of hogwash.

IC: Right. Well speaking of labour market shortages and the current economic environment, what would be the demographics explanation for what we have been through over the last couple of years?

Foot: Well I think you probably have in mind the last couple of months more than the last couple of years in that question Layth.

IC: All right.

Foot: And as I prefaced my earlier comments, demographics doesnít have very much to say about the short-term. But I think I have done a lot of research in the last year on global demographics. And whenever I put my global figures on the table people are quite shocked.

Most people understand that China has the most people in the world at 1.25 billion people and India is second with 1 billion people. Most people understand that the US is the third largest country with 280 million people but then things start to get interesting. Not a lot of people realize that Indonesia, with over 200 million people, has the fourth biggest population in the world and they, of course, are 92% Muslim.

The fifth largest country in the world with 170 million people is Brazil. So Canada wouldnít want to alienate Brazil as a trading partner, as we have been doing. And perhaps the most powerful piece of information is the sixth largest country in the world used to be Russia, with 150 million people but their population is now declining and another country in the last two years has passed Russia as the sixth largest country in the world with their population rapidly approaching 150 million and that country today is Pakistan.

IC: Wow. That is fascinating. Okay. Well now what is the implication of the size of these populations and I mean, isnít the demographic makeup of the population a very important indicator on where these countries are going to go, almost more so than the size of the population?

Foot: Size is very important if you are just simply interested in the volume of products. But you made an excellent point Layth. The demographic composition is crucial, and as we know Europe and Japan, of course, are much older than Canada and the US.

So Europe and Japan are really never coming back as global economic powers. They have got no young people to bring the latest technology online for them because it is young people who are always the champions in new technology.

Brazil and Indonesia are beginning to emerge as major economies. Now of course they are going to be in debt because they are much younger than Canada and the US and you borrow when you are young as individuals and as countries.

But I think the frightening thing, if you are sitting in North America, maybe not so frightening if you are sitting in other countries of the world, is that when you look at a country like Pakistan, 20% of Canadaís population is under the age of 15 and almost 45% of the population of Afghanistan is under age 15. They are averaging well over five and a half children per family compared to one and a half here in Canada.

IC: So what does that mean for Pakistan? Does that mean that Pakistan is likely to benefit economically from having that surge in young population?

Foot: Probably not because in fact if you are not yet of working age and under age fifteen, obviously it is an age that we in North America tend to think of a working age, it is not quite so relevant in many other countries of the world.

But even if we used under age twelve, the message would still be the same. If you have got a big percentage of your population that is not yet of working age, then you are going to have to provide lots of food to feed these people.

It is like a big tax burden and so it is a tax on people of working age to feed all these young mouths coming behind them. And it is just the reverse in Europe and Japan where the tax on the working age is to satisfy the healthcare needs of the seniors.

This is the education and recreation of the needs of the young. And so it is countries that donít have this massive bulge at the base of their pyramid that are going to have the best opportunities for future economic growth.

IC: Now that wouldnít qualify Europe and Japan on the other hand?

Foot: No but it certainly would qualify Canada and the US because of all the Echo children.

IC: Okay. Well letís talk about Canada and the US. Now in your book you have definitely singled out real estate and I couldnít tell, is that good news or bad news for real estate markets?

Foot: Well once again you have got to sit down and do a sort of analysis that you are alluding to in your previous comment. What we have got now is growing numbers of people in their 50s who increasingly only want some peace and quiet in their lives and increasing numbers of children, their children who are now teenagers, heading into their 20s.

So letís quickly understand, when you are young you want to live downtown in apartments. In your 20s you want to be where the noise and action is, near the discos and you are going to rent.

So if you have got a big percentage of your population that are in their 20s you are going to have very dynamic cities with lots of demand for rental accommodation. And that is what we had in the 60s and 70s in Canada when the Boomers were in those ages.

Then you get to your 30s you start a family, you need a backyard for your kid and your cats to play in. So you move out to the suburbs. So over the Ď80s and Ď90s, the Boomers all moved from downtown out to the suburbs.

The growth of our downtown ceased and we had this huge suburban sprawl grow up around most of our major centres in Canada and suburbanization, the 905 region around Toronto would be a fine example, replaced the urbanization.

So that is your 30s and 40s. Then you get to your 50s, you want more peace and quiet in life and that is when you start to look at vacation property and that is what Intrawest understands. You want to move further away from noise and action as you want to seek more peace and quiet in your life.

You are not going to do it immediately because you are still working in your 50s but by the time you get to your early 60s, you are going to want to have established that. And so that tells you the vacation properties over the medium term, over the next ten years are probably going to look very good.

But meanwhile the suburbs stop growing and the Echo kids start leaving the suburbs and come downtown looking for rental property. And so you canít imagine what is about to happen to rental accommodation because we havenít built any rental property in the last decade, particularly here in Ontario. And that means rental prices are going to be a huge, good investment.

IC: Wow. Well that is a fascinating analysis. Well now tell us about your thoughts about the stock market. Now we interviewed Harry Dent, who I am sure you are familiar with, a US demographer who told us that he was extraordinarily bullish for the North American equity markets over the next six years or so with a little uncertainty over the next year.

But we juxtaposed that with Ravi Batra who, of course, is extraordinarily bearish and I am wondering what your thoughts are?

Foot: Well I presume you interviewed both of them post September 11th?

IC: Well we havenít spoken to Dent post September 11th but Ravi Batra, his point of view hasnít changed much since then. We did interview him recently.

Foot: Well then I doubt that Harry Dentís point of view has changed all that much either because once again, if you are drawing on demographics it is more the medium to longer-term that you are interested in.

I might add that while I am going to be somewhat bullish on the stock market, remember that demographics would never have been able to justify the huge increase in the prices that we saw over the 1990s.

So while I may remain bullish on the stock market, it is for a gradual, gentle increase, the Boomers get to their 50s and start building their portfolios for their retirement. All the research is showing that it is not the individual investors, the small investors, the Boomers, the people that bailed out of the stock market in the last two or three months or even the last six months. It is the institutional investors that have pulled out.

And so the Boomers and those individuals still doing their investing for their retirement years, not through regular pensions but on their own account, are still, they donít care what the stock market price is today. They care what it is fifteen years from now when they have to cash out in retirement. That is what they care about. So they are going to be there for the long-term and that hasnít changed even post September 11th.

IC: Now I wonder if you could go so far as to make an argument that the types of stocks that will be of interest to an increasingly aging Boomer population might be interesting.

Now I mean we often think about it in terms of sector analysis but I was thinking investors in their 50s and 60s may become less intensely interested in huge capital gains.

They have already given up on being completely rich but now they just want income and some kind of decent growth. So maybe dividend paying stocks would be popular again.

Foot: No, I would argue exactly the opposite Layth.

IC: Really.

Foot: Exactly the opposite. Certainly over the next decade, because you see, the Boomers get into their 50s, over your 30s and 40s you raise your kids. You pay down your mortgage and raise your kids. So most of the Baby Boom hasnít saved for their retirement.

The idea that you save for your retirement while you are raising your kids is absolutely ludicrous. What you do is you pay down your debts, you pay down your mortgage in particular but also all the other debts that you accumulated to buy all the white goods for the house and the automobiles and of course the minivans, right?

So over the 30s and 40s you are debt reduction and in fact that is what is going on North America. Debt to asset levels are plummeting because the boomers are owning more and more of their houses, more and more of their stocks, more and more of their mutual funds, more and more of their automobiles.

So in fact, what you are doing is paying down debt or at last accumulating assets. But they are the financial assets that you borrowed to buy. It is not until your 50s when the kids leave home, that you start to build up your financial assets for retirement, build up your nest egg for retirement that you are going to live off.

So the last thing you want is to take dividends out of that nest egg. What you want to do is have everything reinvested and constantly building because you donít want to start cashing in until your late 60s or 70s and the boomers are a decade away from their early 60s and they are fifteen years away from their late 60s.

This is the first boomers. The peak of the baby boom are only in their early 40s. They are twenty-five years away from this. And so, in fact, over the next decade, what you want is capital gains. You donít want dividends. You donít want income generating income because it is in your 50s when you are building the nest egg for retirement and you are still working either in a regular job or through a consulting type arrangement.

You are still working. You are still generating income for yourself. You donít need to have your nest egg from retirement generating income at this time. You need it ten, fifteen, twenty years from now when you are truly retired.

IC: David, you have mentioned real estate, market shifts and you also mentioned something about leisure interests and people wanting vacation properties. Are there any other industries that are just clearly standout as either blessed or cursed by demographics?

Foot: Well there are certainly other sectors of the economy. They are not necessarily sectors that you always invest in. Clearly you get to your 50s, there are more aches and pains, lower back pain and enlarged prostates for men, menopause for women. The pharmaceutical industry just stands out as a huge growth industry over the next decade as the boomers deal with their little aches and pains, their many healthcare problems in their 50s.

Notice I am not saying that they are going to go to hospital. You donít go to hospital on average until your late 70s. So the pressure on healthcare today has very little to do with the boomers. At least the hospital sector has to do with the parents of the boomers born in the Roaring Twenties. But the Boomers themselves are going to need pharmaceuticals so the pharmaceutical sector is certainly a blessed sector over the next decade.

Probably one of the unblessed sectors over the next decade are childrenís toys because the numbers of births started down in the early 90s in Canada and the mid 90s in the US as the boomers got into their late 30s and 40s and they be came too old to have children.

So the numbers of births are plummeting now and that means that over the next decade the toys industry and all the companies associated with toys manufacturing and toys retailing are probably going to be cursed by demographics.

IC: David, last but not least, how about an overview of the labour market in Canada and the US?

Foot: Well I think it is fascinating how we went from worrying incredibly about youth unemployment in the late 80s and early 90s to worrying about shortages of workers in the late 90s and the beginning of this millennium and having to pay bonuses.

Just simply over a decade we went from a surplus of youth workers to a dirth of youth workers. And that, of course, reflects the pill. Over the late 60s and 70s when the births went down. Not surprisingly twenty-five years later there are fewer twenty-five year olds to do those entry-level positions. And that tells you the last thing you would have ever wanted to do in the 90s was to fire teachers or nurses because you wouldnít have any young graduates coming out to fill their shoes.

And so we now think labour shortages are probably going to be persistent now for the next, forever, because they have happened. Now September 11th has changed some of that talk unfortunately but more importantly we have forgotten all about the children of the Boomer.

The Echo generation is about to flood into the workplace. They are already flooding into colleges and universities because the first Echo kid born about 1980 is now twenty-one and they are about to leave colleges and universities and flood into the workplace over the next decade. So I will suggest that a decade from now we will be worried about youth unemployment again.

IC: Right. Well one last aside David. Can I take from your earlier comments that the debt reduction trend is likely to lead towards lower interest rates over the next decade?

Foot: No you canít take that. You couldnít draw that conclusion from what I have said. In fact it is probably the opposite because you borrow when you are young so if you have hardly got anyone in their 20s and early 30s to do the borrowing, there is not going to be any demand on the demand for money so interest rates are going to be lower. And that is what has happened over the decade.

Again, the impact of the pill has found itself on financial markets. Whereas now we are about to have the children of the Boomers, the Echo kids, beginning to enter the college years when you borrow for college education but more importantly as they get into their twenties and start borrowing for their automobiles and their furniture when they leave home, that will put upward pressure on interest rates. Very gradual, very slow but upward pressure over the next decade.

IC: All right. Well thank you very much for joining us today David and for your extensive insight into the world through the eyes of demographics and the world economy in general.

Foot: My pleasure.

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