Will Scotland fail?

Dow up 103 yesterday, into record territory again.

Gold up $14, still recovering last year’s losses.

Tomorrow, we intend to outline our big picture view. But today, we’re going to reply to colleagues with caveats, quibbles, and corrections .

First, our colleague Merryn Somerset-Webb, who lives in Edinburgh, took issue with our suggestion that small governments are, ceteris paribus, better than big ones: “If Scotland votes for independence it will be as a socialist nation, not a wealthy capitalist one. The result will be profound misery. I really don’t think it is something to wish for. It’s already a disaster in the making. What small countries actually do these days if they aren’t tax havens full of educated people (Switzerland) is indulge in one variety or the other of nepotism/theft/corruption/public sector crowding out, and then collapses.”

She’s probably right about that. Big country or small one, the ruling elite always wants as much mis-government as the country can afford – and often more!

The whole idea of modern government, we remind readers, is to pretend that the feds work for the citizen. The little guy is led to believe that his enemies will be smitten, that the rich will be robbed so that the stolen loot will be given to him, and that all he holds dear will be protected, enhanced and made obligatory. It’s hard to feel sorry for the guy… even when the feds clean him out.

Meanwhile, another colleague – Chris Hunter of the Bonner Family Office – corrects us. The US consumer is no longer deleveraging, he says. Now, he’s borrowing again. Reuters has the story:

“US household debt rose in the latest quarter by the most since before the recession, a sign that Americans may be nearing the end of a multi-year belt-tightening trend, data from the Federal Reserve Bank of New York showed on Tuesday. Total consumer debt rose 2.1 percent to $11.52 trillion in the fourth quarter of 2013 from $11.28 trillion in the third quarter, the New York Fed said in its quarterly household debt and credit report. The increase, $241 billion, marked the biggest quarterly jump since the third quarter of 2007.”

If this is so, it is either 1) mistaken, 2) flukey, or 3) an important new trend. For the moment, we’re going with 1 or 2. But we give the American consumer his due. If there is any way for him to get himself into a deeper hole, he’ll get out the spade. And the Fed’s low-interest rates are waiting for him. And now that he has a little more equity in his house, he may be inclined to start digging.

But he’s getting older. He tires faster. And he’s seen what happens when he gets himself in over his head. He remembers how uncomfortable it made him feel. Demography is beginning to turn against the ‘borrow and spend’ economy. So, it is not clear that he will continue and spending at last quarter’s rate.

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Age and population – along with debt – have big consequences for stock prices. We included a wild figure for the effect of demography on stock prices in yesterday’s letter. Even before we were challenged, we had our doubts. So we wrote to the analyst responsible for it to ask for clarification.

It turns out that the negative 15% figure was a composite, Much of that number is based on the market value of stocks compared to GDP. At today’s levels – based on historical patterns since 1871 – the model predicts that stocks are going down…for a long, long time.

Demography is just one component. Our analyst tells us that demography alone would account for a negative pull equal to about 5% per year – the largest negative number ever recorded. Which makes sense; never have so many people in the US approached retirement at the same time.

But wait. Does an aging population in the US really matter?

“Nearly half of S&P profits come from overseas,” one of our colleagues pointed out. “US demographics shouldn’t have so much effect.”

“But most of those overseas profits come from Europe and Japan,” replied another. “And their demographics are worse than our own.”

Finally, we decided that the source of S&P profits didn’t matter. The model looks at the effect of demographics on stock prices, not on earnings. Prices today are built upon today’s earnings – which include overseas sales and profits. The study merely predicts that old people will sell stocks – no matter what their profits – reducing the price/earnings ratio… and, of course, the prices.

For a nation, as for its capital structure, debt and demography are destiny.

But wait again. Any model based on history assumes that the future will be more or less like the past. It anticipates that extraordinary things that are happening today will be “normalised” tomorrow. In the past, when stock prices, GDP, debt and demographics have been similar to today’s, the process of normalisation brought stocks down – a lot. And over a long time.

But never in the past did a nation have QE and Janet Yellen. Stay tuned.

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  • David Farrer

    Dear Bill,

    Like Merryn I live in Edinburgh. I agree that Scotland’s future (independent or otherwise) depends on what kind of politicians are in charge.

    However, there are those of us who support both independence and minimal government.

    See here:


    Best wishes,

    David Farrer (Wealthy Nation Treasurer)

    • Ellen12

      This is a political decision that the Scottish electorate are entitled to make without being threatened by Westminister’s refusal to allow Scotland’s use sterling or a German minister putting question marks over Scotland’s membership of the EU. There has been an appalling amount of bullying going on in this whole debate when Scottish voters simply need to answer
      1) Do you feel your interests are properly represented by Westminster?
      2) Would you be better represented by an independent Scottish government?

      All threats, ultimatums and even bribes should be treated with the contempt they deserve.

  • EM99

    Let’s look at some non failing small countries:
    Most prosperous: Norway (1), Switzerland (2), UK (16)
    Happiest: Norway (1), Denmark (2), Switzerland (3), UK (22)
    Fairest: Norway (1), Australia (2), Sweden (3), UK (19)
    Best gender equality: Iceland (1), Finland (2), Norway (3), UK (18)
    Please John and Merryn, put away your prejudices, get back to being objective journalists and look at both sides of the story.
    Ed McCabe

  • Warun Boofit

    I do not often agree with MSW but she has it right this time, I saw a bit on the bbc the other day that the east end of Glasgow might be pivotal in the decision , I lived there for 20 years in some of the finest places in the hole of Glasgow ( Barrowfield etc, I am sure you will understand) . I cant see anyone leaving the pub to be bothered with something as trivial as voting, maybe if they placed the poll booth next to the kebab shop and handed out a free bottle of irn bru for a yes ( would not cost much for Alex Salmon to arrange as its just around the corner).

  • Critic Al Rick

    International Integration (II aka Globalisation) is the name of the main game of the Real Powers-that-be.

    So, other than towards any part of Scotland that should become a Tax Haven in its own ‘right’, it wouldn’t surprise me if any non-compliance towards or dissention from that goal (II) would be met with a purposefully vindictive response; that sort of behaviour including, regrettably, towards the UK- (i.e the UK minus the CoLC) should the UK leave the EU. Yes, a lot more severe than the one UK- is living through now…

  • And

    It is interesting that Swiss direct democracy has resulted in low taxes and small government rather than more benefits and big government.

    • Warun Boofit

      Looking at the 1000% cost overun building the Scottish Parliament in Edinburgh I dont think small government and low taxes is what Alex Salmond has in mind for Scotland, they have given us a snapshot of how they would run the country. Switzerland is one of the financially parasitic countrys, not as much a parasite as Luxembourg but without feeding financially off the rest of the world it would be in dire straights.

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