You can never underestimate the importance of demographics in shaping long term investment trends, so I thought I?d pass on these two highly instructive maps.

The first shows a map of the world drawn in terms of the population of children, while the second illustrates the globe in terms of its 100 year olds. Notice that China and India dominate the children?s map. Kids turn into consumers in 20 years, stay healthy for a long time, and power economic growth. The US, Japan, and Europe shrink to a fraction of their actual size on the children?s map, so economic growth is in a long term secular downtrend there.

There is more bad news for the developed world on the centenarian?s map, which show these countries ballooning in size to grotesque, unnatural proportions. This means higher social security and medical costs, plunging productivity, and falling GDP growth.

The bottom line is that you want to own equities and local currencies of emerging market countries, and avoid developed countries like the plague. This is why we saw tenfold returns from SOME emerging markets (EEM) over the past ten, and why there is an irresistible force pushing their currencies upward (CYB). Use any major melt downs this year to increase your exposure to emerging markets, as I will.

Would You Rather Own Them?

Or Them?

Regular readers of this letter know that I rely on long term demographic trends to predict the direction of global financial markets. Let me approach this topic from a different angle, measuring the number of retirees a population must support versus the anticipated burden in 20 years, and its implications.

I start with the basket cases. Japan?s problems on this front are well known, with a retiree population of 30% today growing to 56% by 2030. That means every worker will be saddled with the costs of maintaining a senior citizen. Italy is worse, with the retiree load soaring from 30% to 60%. The rest of developed Europe is posting similar numbers. This is why you rarely hear me issuing ?BUY? recommendations on European companies, especially in the retail sector.

The US is stuck in the middle. Some 21% of our 310 million souls are retired today, and that is growing to 48% in 20 years. If you think our social security funding problems are bad now, just wait. On our current trajectory, bankruptcy is assured. Our saving grace is the large number of young immigrants who are continuously entering the country, legal and otherwise.

China is in a unique situation because of its ?one child? policy, which has reduced population growth by 400 million over the last 30 years. This guarantees that the country will undergoing a slow ?Japanization? that raises its ratio of retirees from 14% today to 42% by 2020. You can count on the Chinese economic miracle to hit a wall in about five years as a vast share of resources have to be redirected to supporting long lived senior citizens, who live on a healthier diet than your or I.

Other emerging markets are in a far healthier position. Only 8% of India?s 1.2 billion are retirees today, and that will only reach 20% in 20 years. Vietnam, Brazil, Mexico, Indonesia, and Malaysia are looking at the same numbers. One of the reasons that these countries don?t have to suffer the crushing expense of western style social safety nets is that they don?t need them. This is the basis for my constant table pounding that this is where you need to be overweighting your equity exposure.

I?ll be going into this subject in more depth next week, when I explain why demographics is so important. Until then your homework assignment is to read the excellent book, Boom, Bust, and Echo by David K. Foot, which you can buy by click here.

The bottom line message here is to be nice to your cleaning lady. She may be supporting you someday.

The ?Japanization? of China

They?re Not Making Italians Anymore

This is Where You Want to Put Your Money

The handful of Chinese army officers I huddled with in the underground bunker all stared intently at their watches. Three, two, one, and then KABOOM! At exactly 12:00 noon, the blast of distant artillery sent a five inch shell screaming over our heads and exploded into the hill above us. The ground shook under our feet, causing dust to drift down from the concrete ceiling above us. It was 1976, and The People's Republic of China just let lose its daily symbolic protest against its errant rebellious province, known locally as the Republic of China, and to you and me, as Taiwan.

Fast forward 36 years later and the Middle Kingdom is sending salvos of money raining down on that prosperous island. Two years ago, China Mobile (CHL), the world's largest cell phone company, bought 12% of Far Eastone Telecommunications (4904.Taiwan). Although a small deal, it represented the first ever direct investment from China into Taiwan. The move triggered a takeover binge by big Chinese companies of their offshore cousins.

It was only a few years ago Taiwanese businessmen suffered long prison terms for just visiting, let alone investing in China, which they have done in a major, but surreptitious way, for 30 years. Readers of this letter are well aware of the long term attraction of both of these countries, which see GDP growth rates at a multiple of our own.

Closer ties between China and Taiwan auger well for the stock markets of the two high growth countries. The iShares MSCI Taiwan fund ETF (EWT) jumped by 17% in Q1, 2012. The iShares FTSE China 25 Index (FXI) has done less well, up 5%, as the country grapples with a temporarily slowing economy. At some stage, a country that is growing at four times our own rate, but at the same earnings multiple, will be a buy. But it appears not yet.

In the meantime, I guess that Beijing figured out that if you can't beat them, buy them. The proxy takeover bid is mightier than the sword.

I am getting tired of the endless procession of perma bulls who keep insisting that, at a 14 times multiple, the S&P 500 is cheap. The last time I heard this was in 2000, when NASDAQ multiples went from 100 to 50, on their way to 10. Before that, it was in Japan in 1990, when multiples went from, guess what, 100 to 50 on their way to 10. Some 20 years later, Japanese multiples are still at a lowly 15.

When I first entered the stock business in the seventies, typical equity earnings multiples were in the seven to eight neighborhood. If you performed exhaustive stock screens, which then involved paging through endless reams of 10-k's, newsletters, and tip sheets printed in impossibly small type, you could occasionally find something at a two multiple, the kind Graham and Dodd wrote about. Anything over ten was considered outrageously overpriced, fit only to be sold on to retail investors. This is when the prime rate was at 6%.

The weakness we saw this week is consistent with my long term view that we are permanently downshifting from a 3.9% to a 2%-2.5% growth rate, and the lower multiples this deserves. I'm convinced that if the circuit breakers had not been installed, we would have been visited by another flash crash last week. If you look at a 30 year range of market multiples, it ranges from 10-22. Given our flaccid growth prospects going forward, I think the new range will be 10-16. It doesn?t make today's 14 multiple look like such a bargain.

Since I am in the long term forecasting business, it was with some fascination that I caught the Associated Press report that minority children born this year may exceed Caucasian children for the first time. Whites lost their majority in San Francisco many years ago, and will do so in California as a whole in the near future.

The report said that the US will have a ?minority? majority by 2050. Whites now account for 2/3 of the population. While minorities now dominate only 10% of counties, they account for 40% of new births.

Demographers say the trend will be reinforced by a large number of Hispanic women entering their prime child bearing years, who historically have more children than other races. More white women are delaying childbearing, reducing fertility.

As demographics is destiny, this is bound to have huge political and economic ramifications for the country going forward. It is also going to influence the marketing priorities of corporations. 16 years ago, Betty Crocker anticipated this trend by using shorter, darker skinned models on the boxes of its cake mix boxes.

Companies that target specific ethnic groups are going to gain a competitive advantage. Furthermore, the rate of interracial mixing is accelerating at a tremendous rate. In California, 50% of all Chinese woman and 60% of Japanese women marry whites. This is amazing given that this was illegal until the Civil Rights Act was passed as recently as 1962.The young millennial generation are virtually color blind. Talk to them and you?ll see what I mean.

Genetically recessive blonde haired, blue-eyed people, who sprang out of a mutation in the Caucuses 7,000 years ago, may completely disappear in 200 years. Pure Caucasians themselves may eventually go too, as they only account for 15% of the world?s population, and that number is falling.