“The emergence of China is the most dramatic event in economic history. We are living in an age of convergence no less dramatic than the age of divergence brought about by European colonialism and the Industrial Revolution. The downward pressure on the incomes of the West’s middle classes in the coming years will be relentless.” – The Retreat of Western Liberalism by Edward Luce
“Demographics show that we are entering a battle between young and old. I call it the ‘Age War.’ The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.” – Robert Kiyosaki, famed author of Rich Dad, Poor Dad
“Today, the attention of government policymakers has turned to the notion of a glut of global saving. Such a shift of emphasis seems particularly surprising from a U.S. perspective where the public discussion has focused on an ongoing decline of private saving and the re-emergence of large budget deficits. Certainly, the United States is not plagued by an oversupply of saving. The absence of saving in the United States, in conjunction with strong domestic investment opportunities, has created an unprecedented large current account deficit — $800 billion in 2005, and still growing. The U.S. has emerged as the world’s largest debtor nation by a wide margin.” – Saving and Demographic Change: The Global Dimension by Barry Bosworth and Gabriel Chodorow-Reich, The Brookings Institution
Analysing data covering 85 countries for the period between 1960 and 2005, researchers at the Brookings Institution found that (1) the highest saving rates are associated with the population aged 40 to 50 years old and (2) a population’s savings rate is likely to exceed its rate of investment when the relative population of 35 to 64 years is growing at a faster rate than the total population outside the 35 to 64 years old age bracket.
The findings of The Brookings Institution research make sense. Children earn little yet consume much and require significant investment into their education and well being. Thus children tend to have a negative impact on the gross level of savings. As children grow up, turning into young adults, and enter the workforce they will, in most cases, not earn enough to save much.
As the population ages and the relative share of the older working population (35 to 64 year olds) increases, the situation reverses. A greater portion of the population is in their peak earning years and so savings increase on an aggregate basis.
The situation once again reverses at the stage when the population of retirees starts to increase relative to that of the older working population. Retirees on aggregate have a much lower propensity to save than the older working age population. Thus retirees too have a negative impact on savings.
Investment Perspective
The chart below presents the share of US population represented by 35 to 64 year olds versus the share of US population represented by all age groups outside the 35 to 64 year olds age bracket. Even a cursory analysis of the chart is quite revealing.
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US Population Demographic Profile 
Source: United Nations Data Retrieval System
The end of the last great US bond bear market – which commenced in 1946 and ended in September 1981 – ended around the time the share of the US population made up by 35 to 64 year olds began to increase relative to the share of the US population of all other age groups. This trend of the increasing relative population of 35 to 64 year olds in the US continued from 1981 to all the way through 2005. From 2006 to 2014 the share of population made up by 35 to 64 year olds in the US remained relatively stable; in 2015, however, the share of 35 to 64 year olds started to decline.
If the conclusions of the study conducted by The Brookings Institution continue to hold, the on-going shift in the US demographic profile is bound to have far reaching consequences for the US bond market. We are quite possibly at the early stages of what in many years from now may appear to be the obvious point at which another great US bond bear market started.
The shifting secular trend does not, however, warrant shorting US treasuries. The last secular US bond bear market lasted thirty-five years and can be sub-divided into thirteen parts: seven major price declines and six bear market rallies. Moreover, even though short-term interest rates bottomed around 1941, long-term bond yields continued to decline till 1946. We would not be overly surprised if a similar dynamic played out once again, with short-term rates bottoming in 2015 and long-term bond yields bottoming several years after.
There may well be a superior alternative to shorting US bonds: being long Chinese bonds. China’s middle class population is forecast to expand from the estimated 430 million today to 780 million by the mid-2020s. Combine this with the fact that Chinese households have a much higher savings rate – estimated to be around 30 per cent – as compared to households in the US, where savings rate are estimated to be around 5 per cent, and you have conditions ripe for a secular bond bull market in China.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.