Demographics

TR - Hello, I’m Tom Record and I’m here with Tom Morris. Welcome to Global Infusions, an investment podcast from the Liontrust Global Fundamental team that takes a long term view of today's stories.

Last month we chatted about space – from tiny cubesats to the international space station. This episode we’re going to roam the planet and discuss demographics. If your taste buds are tickled or you have any questions for our next episode, please do send them in via your client contact or through liontrust.com.

So sit back, grab a cup of tea and remember that when we talk about individual companies we are not making a recommendation to buy or sell shares and that some of these companies may not be held across Liontrust’s global fund range.

So demographics is the study of the statistics around populations – and as with any ‘lies, damn lies and statistics’ they can be interpreted in many different ways. But they are important – demographics shape the world and give a glimpse into our more distant future. So Tom, where would you like to go first? Aging, birthrates, immigration?

TM – Well let’s start with the big picture – most richer countries are ageing pretty quickly, as birth rates fall. In fact the average fertility rate across the OECD fell from about 2.8 babies per woman in the 1970s, to 1.6 in 2019,

TR – And that’s well below the replacement rate.

TM – Yes exactly. So the effect on workforces is quite pronounced, as you have baby boomers retiring on one end, with fewer young people joining on the other. This presents a number of issues, from tighter labour markets, to a smaller base of people to tax, to increasing pressure on healthcare systems.

TR - Yes and it’s not easily fixed. Governments are generally not very successful at trying to encourage people to have more children, which for most people is a highly complex decision based on life outlook, emotional state, finances, family situation etc.

TM – Agreed. The other option is immigration. Historically, immigration has been a really helpful way of growing the working population, addressing skill shortages, and boosting economic growth. Immigrants tend to be younger and healthier than domestic populations, and are more likely to be net contributors to public finances.

TR – A lot of the world’s most innovative companies have also been founded by first or second generation immigrants, from Apple and Google to Tesla and BioNtech.

TM – Personally I think a large part of the secret sauce that allowed the United States to be so economically successful over the last 250yrs was an openness to immigration. Ambitious, hardworking people from across the world flocked there on the promise of the rule of law, and the chance to get rich. And if you can cream off people from right across the world who are attracted to those things, then you have the makings of a dynamic and exciting economy.

TR – I agree with that. But the problem is that despite all the positives, immigration is deeply unpopular with a lot of voters. Government policies reflect that, with irrationally tight restrictions on immigration pretty common across the world. Brexit and Trump were both driven in large part by anti-immigration rhetoric. The thing I find most bizarre about immigration policies…

TM – Go on…

TR – it’s when foreigners go to the best universities in the US, excel in a tough degree and then can’t get a visa to stay on and work. These must be some of the most driven and economically attractive people, right at the start of the careers who are sent away to work in a competing country…

TM – It’s too true. So if people are having fewer children, and they don’t want immigrants to come and fill the gap, then there’s really only one hope left for ageing societies. Robots.

TR – Ha! Yes and you can see that in Japan, where the ageing population problem is most pressing, coupled with extremely tough legal and cultural obstacles to immigration which keep it at very low levels.

TM – Yes and there also seems to be a cultural affinity for robots, and so consequently we’ve seen quite a bit of innovation coming out of Japan when it comes to customer service robots like Pepper from Softbank, security and police robots, companionship robots like Paro the seal

TR – Ah yes I remember Paro – a cuddly toy seal which was designed for people with Alzheimer’s and dementia.

TM – Yes it was a real comfort I think. Most of these robots are still pretty basic, but this is the direction that things have to go.

TR – This seems like a good time to mention the obligatory Japanese diaper statistic.

TM – Yes, now seems like the time for that

TR – So since about 2016, adult diapers have outsold baby diapers in Japan

TM – That is quite a stat

TR – In a country where about 29% of people are over 65, compared to just 12% under 15, it’s not hard to see why. In some towns, like Houki, adult diapers make up about 10% of total rubbish, and the local government has started a scheme to recycle them into heating pellets.

TM – Well that’s a sensible measure to take. There’s another interesting issue in Japan that we should discuss – a lack of business heirs.

TR – Aah – and I presume this is a particular problem in Japan because there’s a strong culture of passing businesses down through generations.

TM – Yes exactly

TR – I read that the oldest still-operating company in the world is Kongo Gumi, a construction company founded over 1400 years ago; and the oldest still operating independent company is a hot spring hotel called Nishiyama Onsen Keiunkan, which has been continuously operated by 52 generations of the same family for over 1,300 years!

TM – Oh my! Well that really does give some context to what a problem it is to run out of heirs. One of our colleagues, Tom Hosking, pointed out some research to me last week on this issue – the biggest cohort of business owners in Japan is 69yrs olds, and quite a lot of them don’t have children, or at least don’t have children who are interested in taking over the business, and so they need to go out and find new heirs. This being 2022, there is of course, an app for that.

TR – A dating app for heirs?

TM – Pretty much! It’s called Tranbi, and it bills itself as a ‘succession M&A platform’ that helps to match elderly business owners with younger people who could take over.

TR – Fascinating, and probably something that the rest of the world will need eventually too. Ok now Tom, which European country has the highest proportion of foreign born residents?

TM – Well I’m tempted to say the Vatican, because everyone there has taken a vow of celibacy, but I presume you mean a larger country?

TR – Well the answer is Luxembourg at almost half the population, but behind them is Switzerland, at around 30%.   So… Given the importance of immigration I thought it interesting that the level of immigration in the US has dropped dramatically since 2017 when Trump tightened the visa process. And then the pandemic came along and visa processing pretty much stopped and is still very slow with a 7.5m backlog.

TM – That’s huge! and this has coincided with a really tight jobs market in the US.

TR - Yes and it’s concentrated in a few areas – over 20% of US truckers were foreign born, and about a third of agricultural workers, a quarter of restaurant workers.

TM - and those are all areas that have had worker shortages.

TR – indeed and the flow of working age migrants is at about a quarter of the level of 2016. If immigration had remained at pre-Trump levels there would be 2.4m more working age migrants in the US.

TM – That’s about 1% of the working population, enough to make a real difference.

TR – Tom, let’s change direction… I know you’re more of a cat person, but I’d like to talk a little bit about dogs.

TM – contrary to popular belief there is actually room in my heart for both cats and dogs, especially your dog Flash.

TR – OK well I’ve got a stat you might like … in the US there are now more dogs than children. So 76m canine companions and only 73m under-18 humans.

TM – Amazing! There are about 120m households in the US, so that really is a lot of dogs.

TR – Yes.  It reflects the fact that people are working longer before trying to have children and many are going for dogs instead. This is opening up lots of opportunities from premium dog foods to animal health and vet care.

TM – It also tees up a big investment theme that we’ve been talking about for a while – long pets and short babies.

TR – Ha!

TM – I know it sounds flippant, but that really is the way things are going. Trends are very much in favour of pet related expenditure and against baby related activity. One of my relatives runs a garden centre, and he rents out a few cabins to small businesses who want to benefit from the foot traffic. One of the most successful has been a high end pet products retailer, and a couple of years ago they even organised a doggie santa that you could book to see in December.

TR – A what!

TM – Someone dressed as Santa that you could bring your dog to visit, who’d give them a cuddle and a Christmas present. So very similar to the version that people take their children to each year.

TR – But for dogs

TM – Yes for dogs, and it was super popular. It sold out.

TR – I’m sorry but Flash is going to miss out on that!

TM – Ha! So before we finish on demographics, it’s probably worth thinking about why the birth rate has been falling.

TR – There are traditional answers that I’m sure have played a part, like improving career prospects for women, availability of contraception and that sort of thing

TM – Yes but I wonder if politics that is mostly aimed at pleasing older voters has also played a part?

TR – How so?

TM – Governments have generally put in place policies to boost house prices and keep them high, to benefit the mostly older voters who own most of the houses. In the UK, that’s come in the form of restrictive planning laws, lack of capital gains taxes on properties, and of course lower and lower interest rates. Homes have become unaffordable for a very large number of people. Perhaps without the feeling of security, and financial benefits, that home ownership brings, people just feel less comfortable having children?

TR – QE as a factor behind ageing populations – maybe?

TM – I think we’re only beginning to understand the effects of exceptional monetary policy

TR – OK let’s move on to the news. Tom, what do you have for us this episode?

TM – Well the first thing I wanted to talk about it is a bit of a follow up to last month’s episode on space, and it concerns Moondust.

TR - As in dirt from the moon?

TM – Yes, but not just any old dirt. This is moondust collected by Neil Armstrong during the Apollo 11 landing in 1969 – the first time any human had been there.

TR – OK – so pretty special – but why is it in the press?

TM – It was sold at auction, by Bonhams in New York, on April the 13^th, for about half a million dollars.

TR – And how much dust are we talking about here?

TM – Well, not a lot, in fact it’s basically five pieces of sellotape, with specks of dust on them, mounted on little aluminium plates.

TR – Are you sure it wasn’t April 1^st? OK, so a pretty steep price per gram, but I presume you’ve mentioned it because there’s something more going on here?

TM – Yes – this was actually part of the first sample of NASA-authenticated moondust to ever have been legally sold.

TR – Oh

TM – So NASA has collected over 2000 moondust and rock samples over the years, and several of them ended up being taken home as souvenirs by astronauts, or otherwise getting pilfered, and NASA has been extremely litigious at getting them all back, apart from one sample, this one, that got away.

TR – So what happened?

TM – Well after the Apollo programme had finished, NASA had more moondust than it needed, so it lent a dust collection bag to a space museum in Kansas, with an appraised value of $15, and forgot about it. It was then stolen from the museum by an employee, who was secretly selling off artefacts for cash. When he was discovered and convicted, US Marshalls seized his collection and sold it off in an online auction. NASA didn’t notice, but a lady called Nancy Lee Carlson did, and she bought it along with a few other items, for a thousand dollars. She then sent the dust to NASA for analysis, and they confirmed it was real, and then refused to give it back, claiming they had ownership rights over all moon dust.

TR – I presume she didn’t give up

TM – No, she sued NASA, and won, with a judge confirming that the government had sold it to her fair and square, and so the bag was returned to her. She then sold the empty bag, which probably contained a few little specks of remaining dust, in 2017. You see NASA had removed most of the dust from the bag for testing, and had not returned it to her with the bag. So she sued them again, and won, getting back the dust samples, which is what were sold this month. They must be one of the most valuable things, by weight, ever sold.

TR – Fascinating. So my first piece of news this month is also on space - Amazon has announced that it is sending 83 rockets into space to launch the majority of its initial constellation of 3,236 satellites.

TM – This is their project Kuiper that’s aiming to bring internet to underserved communities?

TR – Exactly.  And the launch schedule they’ve committed to is one of the largest ever – it’s expensive too. Amazon will spend ‘at least $10bn’ on this.

TM – And those launch commitments will let the rocket companies invest more and that should lower launch costs in the future for them and others.

TR – Yes, so Space should become even more accessible in the future.

TM – There are going to be a quite a lot of these mini satellite constellations in the sky by the end of this decade – it feels like at some point somebody’s going to have to regulate satellite placement, in order to avoid collisions.

TR – Yes quite possibly, but it’s difficult to imagine the major space nations agreeing to a common overseer. That said, just last month, the United Nations passed a resolution to ban mercury that was being used by satellites to steer.  So each satellite would have ejected little amounts of Mercury to change course, which would have damaged the environment. Now they’re using other propellants.

TM – So at least there’s some progress there. Right, my next snippet is on a collaboration between Epic, Lego and Sony on developing a common metaverse.

TR – Three pretty big players.

TM – Yes exactly, so it seems quite meaningful. Epic is the video game company behind Fortnite and the Unreal engine, Lego of course has been making toy characters and worlds for children for decades, and Sony has a wealth of IP in its movie studio and music label, as well as its Playstation business.

TR – Heavy hitters indeed - so what have they agreed to?

TM – So Epic and Lego announced what they called a ‘long term partnership’ to create a metaverse for children, which is something I think they’re both really well suited to.

TR – Yes the world presented by the Lego movies is not far off a metaverse already.

TM – Exactly. Sony and Lego, through its parent company Kirkbi, also agreed to invest $1bn each in Epic, at a valuation of just over $30bn.

TR – That's going to be interesting to follow.

TM – Yes agreed.

TR – My last piece of news this episode is about a report from the Centre for Information Resilience that harks back to our cybersecurity episode. In particular it looks at how two cryptocurrencies called Prizm and Ouroboros have been aggressively marketed in a Ponzi-scheme like fashion, and how they’re linked to senior people, who are under sanctions, in Donetsk.

TM – A real story of being careful who you buy from.

TR – And just to stick on the cyber front – the hacking wars in Russia appear to have taken a big step up. As well as Anonymous and others taking down websites, we’ve seen huge data troves from all sorts of companies being published on the internet from groups like Distributed Denial of Secrets.

TM – Yes – from the media censor, to the Central Bank to Rosatom. There are hundreds of gigabytes of data now in the public domain…

TR – And now journalists are pawing over that data, trying to piece together interesting stories. We’ve already seen the first from the journos at Meduza.

TM – So the last thing I wanted to mention this month is an AI that can generate images based on descriptions, called DALL-E 2.

TR – Ah yes this has been getting a lot of press attention – it looks incredible.

TM – Yes absolutely – I can see why people are getting excited. Social media is now full of examples from people who’ve been allowed to use it, giving commands like ‘an astronaut riding a horse through space’, ‘a hedgehog using a calculator’, which are astonishingly good. It can generate photorealistic images, as well as paintings and illustrations in the style of certain artists or artistic movements. It can even alter existing images.

TR – It does seem like one of those advancements that changes the game. How does it work?

TM – Well strictly speaking it’s not a single AI, but an AI system, made by a nonprofit organisation called OpenAI. It uses two core AIs in order to function – the first one called CLIP, which is able to understand text instructions, and the second called GLIDE, which uses those parsed instructions to generate images. The success with which it combines those two steps, and the diffusion models they are based on, is to be honest quite breathtaking.

TR – So is there anything it’s not good at?

TM – Yes – at the moment it can’t really produce human faces, and it’s also pretty bad at hands. This is in part due to a choice made by the programmers at OpenAI, who did not want DALL-E to be used to generate fake photorealistic images of real people, so they deliberately avoided using images of faces when they were training the AI.

TR – I see – and when you say training, you mean when the AI was shown labelled images so that it could learn what commands meant.

TM – Yes exactly – it was trained on hundreds of millions of labelled images. Scale is a massive part of building a successful AI, and having access to huge libraries of labelled images is essential. It’s why companies like Google have a big advantage.

TR – So it’s nice to see this advancement coming from a small nonprofit.

TM – Agreed.

TR – I do think it could transform the stock image industry, where journalists and businesses pay companies like Getty for pictures to accompany articles and adverts and presentations. DALL-E 2 looks like it will be able to generate custom images that exactly fit what you want, essentially for free.

TM – Yes it looks like a major disruption. It would certainly be nice to see something like this built into powerpoint, banishing clipart to the history books.

TR – I don’t think anyone would shed a tear for that!

TR – Thank you for listening to Global infusions - a podcast that believes that the best discussions are had over tea and cake. We hope you've enjoyed your cuppa and our thoughts on demographics. Please do subscribe through Apple or Spotify and with that we wish you goodbye!

TM – Goodbye!