Managing the Aging Population

Every Monday, I sit down and gather up the macroeconomic clippings from the prior week and assemble them into a packet of about 50 pages for the rest of the analysts on our staff. The analysis is supposed to boil down the relevant factors affecting financial stocks, which are the only companies we buy and sell short. In a series of articles, I hope to lead you through the summary of five months of packets, starting with global issues, then U.S., financial sector and hedge-fund issues.

Today I'll start with the broadest of scopes, the global macroeconomy, and explain how the biggest issue facing the globe is its aging population.

We Are Not Alone

The single most significant event in the global macroeconomy over the past 10 years has been the addition of over one-third of the world's population to the capitalist system. Combining that with an increased ability to send detailed data anywhere over the Internet has greatly expanded the amount and division of labor.

This has driven down the price of labor and raised the return on capital for business processes that can use the new labor. It has enabled consumer goods to be produced more cheaply and marketed globally. And these forces are powerful, as places that were previously zones of cheap labor, such as Mexico and Bangladesh, find their business shifting to China. The most troubling aspect of this is that the companies losing these manufacturing processes are still underdeveloped, and not ready to participate in more "productive" pursuits.

As these newly capitalist economies expand, they drive competition for resources, some of which were not thought to be particularly scarce five years ago. Oil, copper, timber, iron ore, coal and other basic materials were not thought to be growth industries as the '90s ended. But they are growth industries now, just as they were when the U.S. and Europe were developing at the turn of the 1900s. These industries will eventually become cyclical again, but not until living standards in the developing world are higher and we see clothing tags that read "Made in the Congo," because cheap labor is unusual everywhere in the world, outside of Africa.

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David J. Merkel, CFA, FSA, is a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. Previously, he managed corporate bonds for Dwight Asset Management. At time of publication, neither Merkel nor his fund had any positions in the securities mentioned in this column, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Merkel cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send your comments to [e-mail].

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Merkel is employed by Hovde Capital Advisors LLC (the "firm"), a registered investment advisor with its principal office located in Washington, D.C. The Firm and/or its affiliates have or may have a long or short position or holding in the securities, options on securities, or other related investments of the issuers mentioned herein.