There is a cult of market observers known as demographers. Joe Chamie is one of the world’s leading demographers and the director of research at the Center for Migration Studies in New York (see Guy Kawasaki 2006 interview). Recently, the Kauffman Foundation Investment Committee spent time with Dr. Chamie to discuss how demography might shape the investment climate in which we live over the next 20 years. Chamie is an unapologetic bull on the United States of America. It’s in the numbers.

Demographers, he said, are often characterized as accountants without a personality. Unlike the stock market and economies and governments, he remarks that demography has irrefutable certainties. We’re all going to die. Furthermore, we must project how those presently alive will age and move (geographically) over time if we are to see the future.

Russia, Japan, Germany, other European nations and even China are rapidly aging and dying. They can’t even replace their populations. The U.S., he says, incorporates immigrants into society and they become part of our fabric. Our own relatively high birthrate and family size in the U.S. versus other developed countries combined with strong immigration gives us hope that we might grow out of our problems. Germany and Italy in 2050 might instead “be like Disneyland…great places to visit but with nobody home.” Europe was 25% of the world’s population for centuries. Today, Europe represents only 13% of the world’s citizens and may fall to 6 or 7% over the next 50 years. The U.S. continues to be a magnet for the world’s best and brightest.

Consider Sergey Brin, a first generation Russian immigrant, whose family fled a society that imposed artificial rules about who could succeed (see Wikipedia on Brin). Denied in his family’s country of origin, his mom and dad brought him to America. I find it interesting that those who are artificially constrained in achieving their dreams end up here both smart and hungry. How much has the world economy benefited from Sergey’s ideas enabled within Google? In Russia, Sergey’s father asked: “What may I do?” Sergey, an immigrant into our entrepreneurial culture, asks instead: “You can really do that here?” We forget that people around the world dream of being part of our economy, despite press reports to the contrary.

So what do immigration and birth rates say about our current economic pickle. Ned Davis Research helped me look at this question a little more fully. I wondered whether the housing stock in the U.S., which served as kindling for the economic fires in this country, correlated with long-term demographic patterns. The answer is stunning and makes me giddy and hopeful for the first time in months. I’m sure this data has been published other places. I just haven’t seen it.

Here’s how I interpret the story, given some liberty to interpolate other ideas. We watch people live a lot longer. In 1900, men lived to 48 and women to 49. Social security was instituted when the average man dropped dead at 62. So the benefit eligible age of 65 was designed as a death benefit for the woman – who always lives longer (that’s another column). Men now live to 75 and women die in their 80s. We now see three generations living in the same housing stock that accommodated only two for most of mankind’s history.

New Family Starts

The chart above shows occupied housing stock on the left axis and the percent of the population 20 – 29 years old on the right. This serves as a proxy for family formation. Two things are striking about the chart. First, there is an enormous fall-off in implied family formations (light gray line) from about 1987 to 2002. We continued to build “move up” housing stock and retirement villas until there was too much supply (the solid dark line). Sorry, for the chart -- I'm still fighting with HTML stuff. Industry data this month shows that we are building fewer residential buildings now that at any point in our modern history. If banks won’t lend and builder’s won’t build today for obvious short term reasons, then what will happen to prices between 2010 and 2015 when we’ll see family formations at the same rate we saw in the 80s?

That, my friends, says this economic supply and demand imbalance will pass. It also says that we’ve got a bull market in new consumers that roars over the next five years. This is my good cheer for the New Year.

Harold S. Bradley
Chief Investment Officer, the Kauffman Foundation