Eight Billion And Counting

Earth hit a big milestone last week: the planet is now home to eight billion people. This population growth is also being accompanied by the most important demographic change of this century, aging, which has a wide range of social and economic implications. In other news, data out last week showed the Japanese economy unexpectedly shrank in the third quarter and UK inflation hit a fresh 41-year high in October. Meanwhile, shares in Walmart – the world’s biggest retailer – surged after giving a positive earnings update. Finally, in the crypto world, FTX’s shock collapse has pushed the Grayscale Bitcoin Trust to trade at a record discount relative to the value of its underlying holdings – and that’s tempted some big-name investors to jump in.

Macro

Here’s a fun one to start off the week: the world’s population hit 8 billion people on Tuesday, according to the latest UN data. It’s expected to hit 9 billion in 15 years’ time and then peak at around 10.4 billion in the 2080s.

But it’s important to note that aging, not population growth, is the most important demographic change of this century – and the one investors should focus on because of its social and economic implications.

First, a rapidly aging population means there are fewer working-age people in the economy. That could lead to labor shortages and, ultimately, lower economic growth accompanied by higher inflation (caused by higher wages to hire qualified workers). Second, given that demand for healthcare rises with age, countries with rapidly aging populations must allocate more money and resources to their healthcare systems. Third, the combination of lower tax revenue (due to fewer working-age people in the economy) and higher spending commitments on healthcare and pensions will greatly strain public finances.

So what do the UN projections say regarding aging? With mortality falling, the number of people aged 65 and over is expected to rise from 783 million in 2022 to 1 billion by 2030 and reach 1.4 billion by 2043. This increase of 623 million in 20 years compares with the seven decades it took for the population of pensioners to increase by 651 million to its current total. The issue of an aging population is more acute in some countries than others. For example, about 30% of Japan’s population is currently aged 65 and over.

Speaking of Japan, new data out Tuesday showed the Japanese economy unexpectedly shrank in the third quarter, slipping into reverse for the first time since last year. GDP shrank 0.3% from the previous quarter, which translates to an annualized decline of 1.2%. That drop contrasts with economists’ expectations of a 1.2% rise and second-quarter growth of 4.6% (both figures are annualized). The main culprit was the weaker yen, which heavily inflated the country’s import bill. But a surge in Covid cases over the summer also played a role by slowing down a rebound in consumer spending.

Data out a day later showed UK inflation hit a fresh 41-year high in October on the back of soaring energy and food prices. Consumer prices increased by 11.1% last month from a year ago – higher than the 10.7% economists had expected as well as the 10.9% peak inflation forecast by the Bank of England (BoE). Inflation is now more than five times higher than the BoE’s 2% target despite eight interest rate hikes in the past year, meaning the central bank will likely have to raise rates even more forcefully to prevent spiraling prices. The only silver lining is that things could’ve been worse had the government not introduced an energy price guarantee that limited the year-on-year surge in electricity and gas  prices. Absent the price cap, October’s inflation rate would’ve been 13.8% – by far the highest among G7 countries.

Stocks

Shares in Walmart rose 6.5% on Tuesday – the most since July 2020 – after the world's biggest retailer reported third-quarter earnings and revenue that both topped analysts’ estimates. Sales grew by a better-than-expected 8.7% last quarter from a year ago on the back of higher prices and cash-strapped customers flocking to its stores to find discounts amid surging inflation. In fact, inflation’s so rampant that even higher-income shoppers are checking out Walmart’s budget-friendly stores: the firm estimates that around 75% of last quarter’s market share gains came from households with incomes over $100,000.

Walmart also reported progress in reining in its bloated inventory, working through the excess stock that unpredictable spending patterns had left it with earlier in the year. The firm’s inventory grew by just 13% last quarter from a year ago – a far cry from the previous quarter’s 25%. That’s good news for investors who don’t want to see piles of excess stock being sold with heavy discounts during the all-important holiday season. Finally, to round off all the good news, Walmart also announced a new $20 billion share buyback program.

Crypto

Last week, the Grayscale Bitcoin Trust (GBTC), which is solely invested in bitcoin and meant to track its price, was trading at a record 40% discount relative to the value of its underlying holdings. That was too much for superstar fund manager Cathie Wood to ignore, who snapped up more than 315,000 shares (worth roughly $2.8 million) on Monday for her ARK Next Generation Internet ETF.

She could be on to something: buying GBTC at a 40% discount to its net asset value (NAV) is akin to buying bitcoin at around $10,000, versus its current price of around $16,500. But there’s also a problem: there’s no guarantee that the fund’s discount to NAV will ever close. See, the dislocation is a result of the fund’s structure, which doesn’t allow for redemptions, meaning that shares can’t be destroyed to keep pace with diminishing demand. That dynamic has widened GBTC’s gap dramatically this month as the fallout from crypto exchange FTX’s shock collapse dragged bitcoin significantly lower.

This week

The third-quarter earnings season is nearing an end but there are still a couple of important names reporting results this week such as pandemic-favorite Zoom Video Communications and Chinese internet giant Baidu. The economic calendar is also a bit light this week, but we have eurozone, UK, and US PMIs on Wednesday as well as the minutes of the Fed’s last meeting.