A TPDEARR Article
Trans-Pacific Dynamic Equity Allocation Research Report
Warning! You are living in a consumer society. This is not a drill. Your life costs money. Warning!
You, yes you, are an economic agent, and people are studying you, constantly; “others” are endlessly quantifying and comparing and evaluating and cajoling and nudging and influencing your economic personage, and as long as you seek to participate in human society, you cannot escape it. Your. Life. Is. Valued… …financially. Studying you, is studying financial-you. If we may:
Economists, particularly of the macro- variety, subsist on the practice of looking at groups of people and measuring them with financial metrics, then delivering these “results” to paying customers, frequently policy makers—your own government. The details of what you consume—fundamental capital flow data—are part of a highly coveted stream of information these days. According to a Stanford University textbook chapter on the subject, consumption, as an economic idea, is “a fundamental building block of modern macroeconomics”, and we cannot ignore the influence that this school of thought (“neoclassical”/Keynesian) has had on the formation of contemporary capital flow dynamics and “the way the world works” as a whole. Measuring what people consume influences planning which guides capital allocations and the ways in which money most-readily grows (according to the infrastructurally-available levers and pulleys of the present-day economic system, within their domestic contexts,) thus they are of fiduciary interest to the companies whose stocks we invest in. Understanding motivations and indicators within this system helps planners of financial resources, and can help us, recognize and navigate profitable opportunities as they emerge.
MBAs must master this type of neoclassical thinking to go on and “contribute” to society; implementation of this methodology is bread-and-butter to current macroeconomic practice. Here in this Demographic Trends article, however, we will be analyzing this idea of “consumption” from demographic angles, not macroeconomic ones, to highlight definitive social contours in the trans-Pacific equity investment environment. In so doing, we also discuss what may be ineradicable flaws in the logic of the standard practice. Clearly, combining and analyzing groups of people (a demographic exercise) along with econometric models (a macroeconomic exercise) seems like an obvious synthesis of the two relevant realms of reference, but only the latter of these fields lends itself even somewhat-cleanly to mathematical processes. Human demographics are too messy to be accurately measured with econometrics—the assumptions that must be made and prematurely-defined about the immeasurable future behaviors of irrational people have the effect of divorcing the practice from reality1.
Not only will individuals (sometimes) react to unforeseeable future circumstances irrationally, but even broadly-shared perceptions of how to participate in the sea of capital flows vary widely among individual members, especially across demographic groups. As soon as we start measuring seemingly-similar variables (like human consumers) with fundamentally different constituent components (like the region-specific factors influencing spendi-ness), then we aren’t doing “the same” equation anymore; cross-comparison breaks down. Two sets of two different things could be represented similarly with quantitative metrics, but that doesn’t necessarily express anything inherent about the relationship between them, or about either thing in-and-of itself. In short, exercise extreme skepticism when comparing statistics about spending habit differences across demographic groups; absolute figures about “consumption” behavior are overly-reductive and don’t illuminate much without additional context.
As a positive revolution of thought, the field of behavioral economics has made great conceptual strides in incorporating human psychology and evolutionary principles into a more-applicable comprehension of economic agent participation—the life of a consumer in a consumer world. Andrew Lo put forth the Adaptive Markets Hypothesis (21 years ago now!, hoy) which laid out a framework for understanding human-precipitated market behaviors through principles of evolution, implementing reasoning founded on heuristics that independently emerge from the human condition. This notion is brilliant, and instrumental in improving understanding of human involvement in a money-powered economy, but it also lays bare the non-mathematizable “mess” of human psychology involved in economic participation. While some rather-concrete implications can be made from analyzing heuristics dealing with financial psychology (like the recency bias, the overconfidence fallacy, anchoring, herd mentality, loss aversion, the sunk-cost fallacy, or post-purchase rationalization, to name some of the headliners,) it’s important to remember the primacy of individual subjectivity, and that real behaviors never precisely imitate generalizations. To understand what someone consumes, we must understand how what one consumes is determined by the unique combination of local environmental stimuli in play in the maelstrom of their own bespoke subjectivity.
We, individual, mistake-prone, adaptive economic agents that we are, at base, seek to fulfil the existential demands of our human condition, but we endlessly struggle to understand what that even is, and what that process demands in a consumer world dramatically unlike the foraging/subsistence-based one our species was borne of. Making ends meet in a capitalistic society does not appear to have the personal effect of satiating the thirst of the human condition; and yet, vibrant tensions on the surface of the human-money interface2 seem to endlessly result in humans seeking to spend their way through their existential crises. It is a remarkable phenomenon that continually eludes convenient explanation, and which is also uniquely influenced by local factors.
Taken into the broader trans-Pacific context as we move forward, the world is not undoing the cross-cultural dissemination of information and awareness that globalization has beset upon us—Pandora’s Box has already been opened—so we must continue to remain vigilant and perceptive as we all configure our new understanding of human existence in a changing consumer environment, particularly amid the shifting strengths of Western and Eastern viewpoints3. As the greater social discourse becomes more familiar with Eastern thought (predominantly Chinese, but also from the Indian subcontinent and other middle-Asian and Southeast Asian regions) and its very different ways of orienting individual life amid the contemporary human experience, we must adjust our understanding of how groups of people behave in a world where life is bought, essentially. The fact that a Daoist will have a different attitude towards their spending than a Christian is salient. An American Millennial “doing like their parents did” (e.g. Baby Boomers) will result in more spending; a Chinese Millennial “doing like their parents did” (e.g. children of Mao’s Cultural Revolution) will result in more saving. But even when these behaviors occur, how could causative attribution possibly be parsed out from any other influencing factor? The broader mindsets influencing whether or not to spend, and how to direct spending, are ever-changing, and this is one of the fundamental reasons why we incorporate analysis of Demographic Trends into every TPDEARR issue.
To expose the fault lines in the mainstream economic thinking about consumption, and more-intelligently orient our understanding of markets, particularly so that we can take advantage of a bottom-of-the-barrel pricing environment being precipitated by the swelling tariff war of Trump 2.0, consider the different possible “calculations” of consumption in the first section below. All of these metrics are used by economists of some stripe or another to attempt to “make sense” of consumer spending habits numerically4.
Consumption Mechanisms
There are many ways to consider “consumption” economically:
[definition sources in brackets. not an exhaustive list of consumption mechanisms.]
- Consumption – “…spending results from the economic decisions of… …households.” [stanford.edu economics textbook]
- Consumption – “…the sole end and purpose of all production.” [Adam Smith]
- Consumption – the amount of a commodity obtained in a given session or observation. [“Behavioral Economics”; NIH]
- The Consumption Function [Investopedia]
- C = A + MD
where: C=consumer spending; A=autonomous consumption; M=marginal propensity to consume; D=real disposable income
- C = A + MD
- Autonomous Consumption – the expenditures that consumers must make even when they have no disposable income. [Investopedia]
- Discretionary Consumption – goods and services that are considered nonessential by consumers, but desirable if their available income is sufficient to purchase them. [Investopedia]
- Induced Consumption – the rise or fall in expenditures of all normal goods and services relative to a rise or fall in the level of discretionary income. [Investopedia]
- Conspicuous Consumption – the practice of spending money on luxury commodities as a public display of economic power. [The Theory of the Leisure Class – Thorstein Veblen, 1899]
- Marginal Propensity to Consume – measures the degree to which a consumer will spend or save in relation to an aggregate raise in pay [Investopedia]
As you can see, a lot of droll diction serves to obscure the fact that each of these econometrics above deals with human behavior, which exists firmly in uncertainty. The study of economic consumption is the practice of analyzing spending habits of groups of people, breaking them up into discrete demographics based on selected numerical valuations concerning past spending behaviors in an attempt to discern something about future spending behaviors, using partial statistical sets, with the assumption that whatever uncertainty may play in will ultimately be less than sufficient to challenge the results of the economic model being used to forecast. What do you think: do you think this ideation is folly? Or do you think that this system of analysis is good enough that, even while it doesn’t ever accurately predict anything, it should still be used…?
If, no matter what we might be able to determine about historical relevance, the fact of future uncertainty remains, we cannot forget to temper our expectations about the determinative accuracy of the numbers we are dealing with: any determination more than perceived quantity is speculative.
Consumption metrics only measure visible activity, so there is a whole realm of invisible economic activity at play in the real world that goes undocumented by econometric analysis, but certainly impacts the human condition on Earth. While we can look forward to delving further into that invisible activity in a future TPDEARR issue, it’s worthwhile to break down some of the most salient visible aspects of human spending in the here and now, such as levels of “household debt”, as it’s so called by the institutions in power.
Household Debt
Supposedly, we ought to be able to use an analysis of household debt over time in a given domestic economy to make sense of how much given demographics of people are willing to spend. By measuring trends in household debt levels, like the US Fed does, theoretically, it indicates how much and in which ways given demographics are willing to spend in the current currency climate, but the practice is naturally tainted in that it guides the practitioner to infer economic causes for alterations to trends. There are always other, non-economic variables to consider.
Using IMF data, we find that the past five decades have been characterized by a dramatic expansion of the extension of debt-based financial services to new constituencies and demographics around the world. As it is an emergent feature of the increased presence and applicability of the infrastructure of capitalism, there are strong correlations with levels of household debt and overall levels of national development; Switzerland, Canada and Australia, some of the wealthiest countries in the world, are the top three on the list of household debt/GDP. Importantly, we can deduce that because debt services, like credit cards, are an additive aspect of development made newly available to users populating advancing localities, they have a pronounced effect on shifts in capital flows within a given economy; the total “money” available for use becomes assets PLUS debts, where in the past it was only assets. People all over the world prove, time and again, the more money is made available to them, the more money they will spend; restraint is not the natural impulse most humans engage in when confronted with surplus cash. Yes, the broad international tariff war is making things more expensive for everyone, and those who are newly acclimating to the use of debt and credit services are likely to struggle to find healthy economic footing in more dire straits, but the fact of increased capital flows from new debt remains.
Connecting with what can be seen as a globe-spanning wealth ladder, there is no evidence to indicate that greater capital flows result in more equitability—actually, it’s the opposite. Typically, as debt services proliferate through advancing economies and give more people more access to more capital, many less-financially-literate “regular” people/wage workers will actually slide down the relative wealth ladder while a smaller class of capitalists and companies slide up it. It is no secret, and no lie: r>g (=returns outpace the growth of an economy, aka capitalism is more profitable than labor—Thomas Piketty’s enduring core contribution to 21st century financial thought5.)
One of the lessons we can learn from studying changes to household debt over time (and not from studying intra-year debt levels) is that people alter their spending habits according to their relative level of wealth. According to Keynesian theory, people save more as their income increases in relative scale over time (aka as they get relatively richer than their peers), as more of their basic economic needs are more-easily covered by higher income. Actual observation of people groups indicates that people will often consider credit increases to be functionally equivalent to asset increases, and they frequently even spend on credit as if it were cash; another way of stating this relationship is that credit increases are treated as income raises in some very significant ways, particularly spending activity, that are not quantitatively accounted for in conventional Keynesian methodology. Typical consumers struggle to define the differences in spending debt versus assets if both quantities just appear to them as a dollar figure in a digital account. The marginal propensity to consume (from the Consumption Mechanisms, above) fails to adequately encompass the requisite variables to even determine the metric it claims to purport, worthwhile though the metric itself may be, were it calculated properly. The tendency to spend more and increase household debt the more it’s made available can be observed broadly across humanity despite the fact all economies develop at different rates, and amid different cultural circumstances.
Household debt itself is an idea that’s only existed since the end of WWII; measuring it was only applicable to the US and a few nations in Europe until about the 1990s; and there isn’t nearly a long enough history of data, nor detailed or granular enough information, to substantiate any trends making claims about future behaviors. In China, household debt is quite a new phenomenon, and currently sits a bit north of 60% of GDP, not far beneath the US figure a bit north of 70%. But this does not indicate similarity, per se, as the single figure represents lots of complex components that cannot be easily compared. Housing markets, for example, have some remarkable dissimilarities between countries, and the precarious bubblish-ness in the Chinese housing market that’s been inflated by debt-fueled speculation, founded on particularly salient events in opening up property ownership in the PRC’s past, makes the level of household debt incompatible to the US figure. They appear similar, but aren’t.
Additionally, while the features of economic background conditions, such as particulars about the inflationary environment, are indeed nonnegotiable for individual consumers, they are never the sole motivators for behaviors; humans are messy, irrational, loaded with beliefs and personal issues, ‘member? Is a sharp change in household debt more or less motivated by a central bank rate cut or the breakout of a foreign war in a major trading partner? What about to someone who doesn’t intake the news? Which is more powerful in influencing consumer spendy-ment, a breakthrough in battery technology that nominally lowers the price of energy stores inside many forthcoming retail products, or the perception of rising global influence from the sudden and dramatic adoption of a soft power cultural export, like a K-pop song or animated Chinese movie? Or, do people seldom scrutinize their own receipts, and really just impulsively make their spending decisions based on mood after hearing headlines about the price of eggs? These questions cannot be summed up or simultaneously addressed with equivalently measurable mathematics, so our predictive capacity from using only econometrics drops substantially; we cannot cleanly calculate THE future. We can calculate possible futures, but never the one that will actually transpire. Human ingenuity ensures we will never be able to guess what our future selves will be able to guess given their future-set of information.
Limitations, thusly inherently built into statistical forecasting, forever obscure our view of the future, but there are still some things we can be sure of for our intermediate 12-18 month timeframe, such as the continuity of human involvement; also, uncertainty. Rising household debt, while indicating progress on some national development fronts, also represents a significant increase to financial instability. It can be used to strengthen well-conceived capitalist behaviors, but it weakens the financial profile of less-savvy participants, who make up the vast majority of economic agents.
People are fickle consumers, and sentiment changes are tough to gauge, but spending regression is an unthinkable option for most. The circus must go on; swipe it; swipe it; swipe.
Consumer Sentiment Spendy-ment
Heuristics emerge from the human condition as individuals adapt their behaviors to environmental stimuli, primarily in order to more-quickly and less-resource-intensively analyze and make decisions about relatively similar events that continually recur. In a money-powered world, countless money-centric events with high levels of similarity transpire on a regular basis, so humans engage in an incredible amount of experimentation and development of economically-relevant heuristics. Humans are not rational, but they are near-rational…most of the time… most of them… The psychological intent, however unconscious, is to develop nearly-automatic reasoning about money behaviors so that making decisions about daily financial events, whose downstream effects might be significant in the aggregate, is not functionally crippling. People can’t consider literally everything that might cascade from a single financial decision, so they do their best to form a sequence of priorities based on the knowledge available to them and their intellectual capacity. People “satisfice” by developing internal rules that satisfy enough criteria to be perceived as “good enough”, even if they may not be entirely accurate, and they use these internal heuristics to inform their understanding of prices and amounts, as well as behave financially, adjusting to mistakes as they occur, ideally. This roughly describes the view from behavioral economics.
Investigating further, we find that the internally-held perceptions of the individual strongly color the heuristics themselves, and so are highly influenced by cultural factors as well as individual ones—heuristics are environmentally molded, and can become maladaptive when the environment changes. A heuristic-motivated behavior that worked positively for one once might work negatively when the environment changes, or when used by another in another environment, and the contemporary environment is always changing, now even more than it has in past generations. The development of heuristics must match the rapidity of environmental change in order to stay relevant, an increasingly difficult task for us flawed humans. We also see that it’s exceedingly difficult to match heuristic expression across the East/West divide. The ways in which one domestic market of consumers expresses spending sentiment are not easily graphable to another domestic environment.
Philosophically, variance in the perception of the human condition itself ought to be considered sufficient to produce alternative social perceptions of economic reality, alternative collections of motivating factors, alternative heuristics. Thus, while some heuristics can be gleaned by studying a given market, transplanting lessons from such an information set to another is a dubitable process. Put otherwise, if you don’t understand the people and related set of psychological motivations that makeup the market you’re looking at, you can’t possible understand their consumption statistics. People, in the aggregate, are sensitive to price, but that sensitivity, almost invariably, has a local flavor. People are sensitive to price and adjust their spending habits and consumption behaviors in accordance with the perceived consequences that they, themselves, will experience in their local environment. They are frequently ill-informed and mis-informed, and frequently act against their own economic self-interest unknowingly, but they are nonetheless mostly-bound to their own heuristic view of their own economic environment.
The only sure way to get people to spend more is to find them one way or another with more money6, but there’s no way of knowing how any given person’s spending preferences might change over time. People will spend for pride, love, guilt, hunger and many other unquantifiable motivations, always shifting and adjusting in the social zeitgeist unpredictably. So, rather than trying to guess what consumers may have more of an appetite to spend on in the future, we can also gauge what they have an appetite for now, so to speak, and follow demographic migration patterns to ascertain which spending preferences will accompany adjustments to population groups.
Food is not a sacrificial expense. A lot of buzz is made on the spread of the desire for cattle/products globally due to the allure of the American diet (i.e. how many more people in this new market are willing to buy a steak if made available to them), but much less attention is being paid to other taste migrations from other demographics. For example, most American consumers know there are a lot more people in the US from Asian backgrounds than there were 50 years ago, but they don’t realize quite what a significant impact it’s had on their grocery supply chains due to shifting demands in consumer sentiment towards certain food products. Across the US, local and domestic grocers are stocking more Asian ingredients to satisfy growing demand from both increases in Asian-American residents as well as the expanding tastes of current residents gaining exposure to new foreign cultures locally. In many cases, production costs and scale have driven American grocers to import larger and larger volumes of foodstuffs from Asia to accommodate spending sentiment adjustments.
Southeast Asian economies like Viet Nam, Indonesia and Thailand, which are smaller and more export-driven, are all finding some success with agricultural and marine-ag food products, largely in serving growing Asian immigrant populations in the West. Even as the tariff war plays out, consumer tastes around these products are unlikely to dissipate, and may even grow if they become more value-packed relative to price rises in other products. Grocery is a thin-margin game, but there is ample opportunity for well-managed producers who can find the profitable opportunities in tightening geopolitical straits. We are remaining on vigilant lookout for successful ASEAN seafood exporters rising into international trade prominence, and public equity availability. Many seafood products can be used as primary ingredients AND substitutes in a wide variety of Asian diets, so they also have demand redundancies protecting them from some measure of regression with tariff-induced price increases.
The state of international trade is not going to have the effect of making people less price conscious, but it also won’t drive spending towards any foreseeable thing in particular. Uncertainty around future retaliations makes everything more speculative, increasing risk beyond levels of acceptable threshold for many capital outlays. In response, companies will engage in calculated belt-tightening, but consumers may not have the tools to do so.
Are regular people recalculating their daily expenses according to Fed rate policy adjustments? No.
Are regular people going to spend their money on what The Man tells them to? No.
Are regular people going to do their own analysis of the impact of tariffs to their future outlays? No.
Consumers will spend on a combination of what they want and what they need, and sometimes, when those two ideals align, significant upside is possible from a well-calculated investment risk. In other cases, ensuring people have a reliable supply of basic necessities that they can’t compromise spending on, like electricity and the effects of electron flow, is more than enough opportunity for profitability, like with [MAR.25 Squad Asset #1] and [MAR.25 Squad Asset #2].
Final Thoughts
Consumers are touchy and moody and plugged into innumerable non-economic factors, reflected in their spending behaviors. The media reports a lot about consumer sentiment and spending trends and the like, but who are they reporting that to? Regular folk don’t know what to do with econometric information, and true capitalists, bankers and investors aren’t getting their information from the fourth estate. What’s it all for!?
After all, exploration and satisfaction of the human condition is not accomplished with government policy directives. As it would seem, it’s expressed in this day and age through individual spending behaviors, with socio-cultural influences, via the goods and services provided by predominantly-private enterprises. People strive to individuate themselves through their purchases, crafting their own bespoke micro-environments, and the thrust is only augmenting over time. By chance, when policy and capitalist opportunity align (due to both predictable and unpredictable factors) with evolutions in social trends, consumers get extra spendy and capital flows more-readily, increasing profits for investors who have, by chance, taken the right risks in asset selection.
Consider the points made in this Demographic Trends article in coordination with the other MAR.25 TPDEARR articles, and remember that all equity investments are risky. People are unpredictable, and many investments lose out, even when they are thoroughly scrutinized. Make sure allocations to your portfolio are adjusting to maintain sufficient diversification as you deposition from previous Squad picks, and stay particularly vigilant over the next 3-9 months, as the tariff-war plays out, in looking out for target assets reaching “oversold” levels in their trading behavior, pointing to likely bottom-points.
It is always possible to find winners; human optimism is relentless across all demographic groups of economic participants.
Good luck everyone!
- Though, rest assured, practitioners of consumption-based economic modelling will all claim that their inherently-flawed practice is still the best methodology that humanity has to work with… do you actually believe that, yourself?
↩︎ - While money is less and less visible these days in its raw currency form, technology has dramatically increased the ability for commercialization to amplify the idea of money to the general populous. It’s easier to commercialize and advertise now than it’s ever been before in human history, with the joint effect of also amplifying the significance of money itself in the eyes of the public, which, as humans, are proving to be ever-more-easily captivated and lured by clever capitalism. The “vibrant tensions” on the human-money interface represent an ultra-high degree of visibility with respect to capitalistic endeavors relative to others. Humans are attention-directing autonomous agents who frequently misbehave; competing for their attention is competing for their cash, and there’s a lot of support in the attention schema theory to substantiate the reasoning that individuals will perpetually adjust their attention—automatically—and so represent a continuous opportunity to be advertised to, as each new moment represents a possible shift in your attention, a possible adjustment to your preferences, a possible chance to sell you something you didn’t want (or know you wanted) a second ago, before it came to your attention.
↩︎ - …and the reordering of humanity on the universal intelligence ladder, which must now incorporate artificial intelligence and, later, non-Earth intelligence, but that’s a topic for other days.
↩︎ - …and then, in theory, applying mathematical reasoning to quantitative selections in order to produce forward-relevant rationale… we cannot stress enough how imperative this assumption is to the professions of economists.
↩︎ - Even if r > g does not lead to the “endless inegalitarian spiral”, challenging one of Piketty’s lines of reasoning, the fundamental arithmetic of the notion remains. Capitalists—the ones crafting the levers of capitalism—can always be expected to tilt the skills in their favor…profitability-wise; so as long as capitalists are designing capitalism, deploying one’s capital will have more profit (= return = r, in r > g) potential than deploying one’s self as labor.
↩︎ - Inducing them to spend their savings, like the CCP is trying to do with the Chinese consumer base right now, is a turbulent effort with perhaps too much wasted policy-finagling to make it worth the effort.
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tkscm, limited 