Monday, March 22, 2010

Life After Japanese

Not breaking news, but I wanted to mention that Japan’s population is shrinking. This is hardly unique in the world, since a number of other countries are also suffering from population decline, mainly in Eastern Europe. What makes Japan different and has demographers all over the world (all 25 of them) drooling in anticipation, is that they were expecting this, and there is really isn’t much Japan can do to avoid a dramatic depopulation in this century on a scale not seen since the bubonic plague ravaged Europe in the 1300s.

Here are the projections. It’s a really great graph, so click on it, put it in a big window and take some time to look it over.

The estimate is that by the year 2105, the population in Japan will have plunged from its current 127 million to around 45 million. A 65% drop for those keeping score. The action has only gotten started. Last year, the population decline was a modest 75,000, but by the end of this decade the yearly decline should be in the 500,000-1,000,000 range.

Driving the pop- drop is a fertility rate that has been in a steady decline for about 35 years, when it slipped beneath the “replacement rate” of 2.1 births per woman. It currently stands at 1.34, but even if it were to rise again, population decline would still occur since there are fewer and fewer women of childbearing age.

The social reasons behind the fall in fertility are basically that Japanese women don’t want to get married and much less have children. And who can blame them as one Internet poster put it:

“Fewer Japanese women having babies because they don't want to get married to childish Japanese men. Also, babies are expensive, and why bring a child into a world with a looming threat of Godzilla?”

Working women come home after 12- hour workdays to wait on their husbands and kids. Grandparents could babysit, if they weren’t busy taking care of their own parents.

For years, the central and local governments have been extending financial incentives for women to procreate. But you have to question the commitment when it wasn’t until late 2008 that childbirth was even covered by medical insurance (it’s not an illness).

Naturally, not everybody sees depopulation as a bad thing. Japan is still one of the more densely populated countries in the world and when they sought to “reach out” into the world for a little elbow room, the results weren’t pretty.
Still, the process is going to leave the country with a disproportionate number of elderly, and many are worried about that.

Immigration has been the answer for other societies in this pickle. But the Japanese seem to love their monoethnicity and a massive immigration program is unlikely to garner popular support.

Cruel and insensitive internet posters have suggested remedies such as subjecting Japanese males to “tenderization”, by forcing them to watch Sandra Bullock romantic comedy marathons Or spiking the water supply with ExtenZe. Very funny, guys.

Why am I blogging about this? It’s interesting and something to be considered when investing. When Japan’s population is headed for a fall off a cliff, one can hardly expect the Nikkei to bounce back to its 1989 highs (almost 40,000 then, it’s standing at 10,800 now). I know I’ll think twice about buying Toyota stock. (/Investment Theme Justification)

Rural Japan is already feeling the effects of depopulation. If you’re into this kind of thing, here’s a fine blog called “Spike Japan”, depicting the desolation setting in on the countryside. Great depressing stuff.
It’s almost like a preview from the series “Life after Humans.”

Saturday, March 13, 2010

Too Puny to Succeed

Now that banking reform is beginning to be discussed in Washington, much of the conceptual discussion about new legislation surrounds “systemic risk” and “too large to fail” institutions.

Left behind is another structural challenge that faces regulators: “too puny to ever succeed”.

The FDIC puts out quarterly banking statistics, which are quite a good source for stat buffs like myself. LINK.

Here’s a tidbit: as of December, there were 8,012 banks in the US, with over $13 trillion in assets.

I know large numbers are difficult, so I’ll say it again: EIGHT THOUSAND BANKS.
That’s a lot of banks. I mean, how many banks do you really need? Obviously something very wrong happened on the way to industry consolidation.

The UK consolidated its banking industry in the early 20th century. Other countries, like Germany (with over 2,000 banks) have yet to see the shakeout. The US is on its way, with the total slowly coming down from over 14,000 in the 80s. But there is still a long way to go.

Here’s a pie chart with the banks by size.

What stands out here is that there are 2,845 banks with under $100 million in assets and almost 4,500 with under $1 billion. I know a billion sounds like a lot, but in terms of the total market, it represents less than 0.01%.

So we’re talking about a market where 92% of the market players are puny. Individually, they are tiny, minute, and perhaps insignificant. As a group, however, they control 11.5% of the system’s assets, including 17% of the real estate loans. (Can you say “systemic risk”?).

So what? You may say. More competition is great and it leads to greater efficiency. The fact is that in an efficient marketplace, these banks have no chance of long-term survival in their current form. Just think of the characteristics of the industry:

Retail banking has commoditized/standardized products and services. A checking account is still a checking account (even if people don’t write as many checks anymore).

Economies of scale exist. Processing two hundred transactions or whatever costs less per transaction than processing one hundred.

Technology has not only drastically reduced transaction costs (enhancing economies of scale), but is destroying the geographical barriers that protected the small fries. Let’s face it, do you really need to go the bank (branch) anymore? If a bank’s competitive advantage is being “close” to the consumer, how much closer than a click on your computer screen?

Close to 100,000 bank branches operate throughout the US, but although their number continues to grow (slower now), branches are shrinking in size and staffing. Last year, the WSJ reported that Bank of America was going to close 10% of its branches. The report was later denied by the bank, but you have to believe that the issue has been discussed in the bank.

BTW, just to get an idea, there are about 30,000 supermarkets in the US. Three bank branches for every one supermarket, seems a bit much, IMO. LINK

In any case, industry consolidation is now accelerated by the credit crisis. The FDIC can’t shut down these micro-banks fast enough. Of the 30 banks closed by the FDIC this year, 25 have total assets of less than $1 billion. Their challenge has been finding “less puny” and financially stable banks to absorb the operations of these failing banks.

So long Waterfield Bank, Marshall Bank, Evergreen Bank and Charter Bank (etc etc).
We hardly knew ye. You were too puny to succeed.