This quarter was marked by natural disasters and political events.  The quake and Tsunami in Japan and the political unrest in Egypt and Libya reminded us once again, that financial markets volatility does not escape such events.  Fortunately, with increasingly stronger economic fundamentals, the wide fluctuations were short lived and markets quickly recovered.

I attended an investment conference this week  where one of the speakers was Dr. George Friedman from Stratfor Global Intelligence.  Dr. Friedman is an internationally recognized expert in security and global intelligence and author of several books including “The next decade: where we’ve been, where we’re going”.

He described which nations will gain and lose economic and political power and  explained how cultural trends will alter the way we live in the new century.  I thought that his speech was very interesting and a-propos for this   quarter commentary. Here is a summary of my conference notes and excerpts from the studies findings:

  • Demographic trends: The decade ahead will mark the beginning of a massive reversal in the dominant trends of the past 500 years.  Populations will cease rising and  will  rapidly age. This shift is most pronounced in the developed world especially in Japan and Europe. This will greatly affect financial systems.  The retirement system was established in the 1st half of the 20th century when the life expectancy was 62.  As the expectancy now moves towards 80, the pressure will build on government to cope.  There is little doubt that the  normal retirement age will have to be pushed  to  later than 65, that  government retirement benefits will be reduced and workers encouraged to stay employed longer.
  • The aging population trend will also greatly impact labour shortages.  States will have no choice  but  to increase immigration from countries where the demographic decline is less progressed.  Not all advanced industrial countries are aging at the same rate.  Consequently, new patterns of immigration will emerge, as poorer and younger states become the new source of migrants. 
  • Middle East: The U.S.-Jihadist war will subside  over  time. Iran will be contained as it simply does not have the underlying power to be a major player in the region beyond its immediate horizons. Iraq, Afghanistan and Iran will remain issues but two other countries will become more important;  Turkey and Egypt.  Turkey is emerging as a self-confident regional leader with a strong military and economy, becoming a dominant power. As Turkey rises , it will need a large source of cheap labour and markets for exports. The result will be a “coattails” effect on Egypt and a new balance of power in the middle east between Turkey-Egypt and Israel. 
  • Turkey grew at a rate of 8.9% last year.  It has a huge domestic market and by staying out of the European Union will be able to continue to grow quickly. Turkey is an emerging country to watch.
  • Europe: Aging population issues will further develop in Europe with immigration economically essential,  but socially and culturally difficult to absorb. Tension will build between the elite and the broader population as well as between nations especially between Germany and France.  Germany is increasingly becoming dissatisfied with the European Union and forming new relations with Russia.  Technologically strong Germany is a perfect fit to Natural Resource rich Russia.
  • Russia: will struggle to secure itself before demographic decline hits. It will try to move from raw commodity exports to process commodity exports moving up the value chain to fortify its economy.  This is a very long-term and uncertain proposition.
  • Asia: China’s economy growth and economic model are not sustainable. The model favours employment over all other concerns.  Eventually, manufacturing margins turn negative as they did in Japan in 1991 and Indonesia in 1998. The Chinese model is only sustainable as long as developed nations continue to consume its goods in increasing volumes produced with cheap labour.  China will have to make important adjustments.  We can expect a more modest rate of growth for China in the next decade. India lacks infrastructure but with its talented population will give rise to surprising dynamism.  India will no doubt continue to grow but in an unpredictable and uneven matter.  Japan’s current nuclear crisis may be a turning point at many levels. 
  • Latin & South America: Brazil and Mexico are major drivers of this area. Mexico is often ignored due to conflicts between the government and drug cartels. However, organized crime manages to over time come to stable understandings.  Just as Chicago prospered after prohibition, Mexico will likely benefit from massive inflows of money that will further fuel its development.  Mexico is an economy to watch.
  • United States: In terms of demographics, the US is aging but at a much slower rate than Japan, China, Germany, France, Mexico, Turkey and India. The United States is also very good at assimilating immigrants.  Therefore, the US’s   biggest demographic problem will be financial.  Retiring baby boomers will generate a capital crunch that will have to be dealt with by not allowing them to retire, cutting retirement benefits  or both. Canada will experience similar issues.  
  • Conclusion: Europe is in much deeper trouble than before driven by its demographic and immigration issues and the US Mexican border will compete with the rest of the world for attention.  The US will remain the heart of the world power with 25% of the world economy.  Economies poised for most growth are Turkey, India, Mexico, North America and China but at a slower pace then recently.

In an effort to make the above a fast and easy read, the resulting commentary is oversimplified.  If you would like to receive the full Stratfor analysis, I will be please to mail or email you a copy!