The boomers’ last stand

Younger Americans feel their voting weight

After years of elder-power, a new generation may well decide the election

This has been a year of the young. The protesters against racial injustice have mostly been in their 20s. The average age of demonstrators arrested since mid-June in Portland, Oregon (one of the centres of activity) was 28. The young have not suffered as much as others from covid-19 itself but were hardest hit by the consequences of the virus.

More than half of those between 18 and 29 lost a job or took a significant pay cut in April, or live in a household where that has happened. About two-fifths of those aged 50 to 64 have experienced the same thing. Young people are the most likely to work in jobs vulnerable to closure, such as waitressing or retail.

And 2020 will be a year of the young in one more important respect. Electorally, it will be the last stand of the baby-boomers (born between 1946 and 1964) and the first poll in which voting will be dominated by generations younger than 40, especially millennials, defined here as those born between 1981 and 1996.

As Bill Frey, a demographer at the Brookings Institution, a think-tank, puts it: “America is moving from largely white, baby-boomer-dominated politics and culture in the second half of the 20th century to a more racially diverse country fuelled by younger generations: millennials, Gen z-ers and their juniors.”

Boomers have dominated American politics since the 1990s, when they became the largest living generation and started to cast the largest number of votes. (Boomers and millennials have an official status, since the Census Bureau uses those terms; all the other generations are private classifications.) Since Bill Clinton’s election in 1992, six of the eight presidents and vice-presidents have been boomers (Joe Biden, the Democratic candidate, is one of the exceptions, being too old). So are most of Congress. Since 1998, the median age of congressional representatives has put them in the boomer class.

But boomers lost their status as the largest generation in 2019, when millennials overtook them in absolute numbers. That year, there were 72m millennials aged 23 to 38, according to the Pew Research Centre, 500,000 more than boomers (then 55 to 73).

For the first time in 2019, more than half of Americans were millennials or younger (meaning members of the generations that came afterwards, called Gen z, born between 1997 and 2012, and post-Gen z, born after 2013). The three younger groups made up 51% of the population in 2019, compared with only 41% the beginning of the decade.

The electoral impact of these demographic shifts has been muted so far because most Gen zs are below voting age, and because millennials have a reputation—not entirely deserved—for being apathetic about politics. But things are changing. “Millennials and Gen z will comprise almost 40% of the electorate in 2020,” says Carolyn DeWitt, head of Rock the Vote, an electoral-mobilisation group, “giving them enormous power.” The two youngest voting-age groups are likely to have more votes than the two oldest, boomers and the so-called silent generation born before 1946 (see chart 1).

The shift towards the young has occurred surprisingly swiftly, not in tiny steps. In the 2010 mid-terms, boomers and older people outvoted the younger generations almost two to one. As recently as 2014 a disparity remained: boomers cast 57m votes; younger voters, 36m.

Four years later, the three younger generations (which now include a few Gen zs) outvoted the older ones. Not by coincidence, the 2018 mid-terms were a blue wave, in which Democrats regained the House.

Younger generations differ from their elders in attitudes, ethnicity and education. According to Pew, millennials and Gen z-ers are the most likely to say governments should do more to solve problems, that same-sex marriage is good for society, that climate change is caused by human activity and that blacks are treated less fairly than whites.

They are also more likely to say fetters should be put on capitalism, says Pew’s Richard Fry, perhaps because both generations started looking for jobs during recessions, the Great Recession for millennials, the covid recession for Gen z.

Pushing up Zs

They are also more likely to be from minorities themselves. As a simple rule, the younger you are, the more likely you are to be black, Hispanic or Asian. Mr Frey calculates that almost three-quarters of 60-somethings are white. Half of those under 20 are not. The impact of young minorities is especially great in sunbelt states. In Texas, 44% of eligible voters are Hispanic or black.

But among voters under 40, the minority share is over half. In Arizona, Hispanics are 31% of all eligible voters but 44% of those under 40. In eight states, including Georgia and Florida, over half of voters under 40 are non-white.

These are places that Democrats have a shot at winning for the first time in a generation. They are also the people most likely to be galvanised by the killings of George Floyd and others.

Millennials and Gen z-ers are better educated than their parents and grandparents (though not necessarily wiser). The Pew Research Centre looked at the educational attainment of 25- to 37-year-olds in each generation. For boomers, roughly 25% had a college degree or higher. For millennials, the share was 39%. The leap has been especially great for women. Among boomers, more men than women have degrees.

Among millennials, 43% of women have degrees, seven points more than men. The Republicans’ disastrous performance in 2018 in suburban counties, former strongholds, owes much to the revulsion felt by college-educated millennial women for Mr Trump.

Education and race are among the most reliable predictors of party affiliation. African Americans vote for Democrats by ten to one or more; Hispanics and Asians by about two to one; 53% of college graduates identify with Democrats, only 40% with Republicans.

Put all this together, and it is hardly surprising to find that millennials and Gen z-ers are far to the left of boomers. Younger voters identify with issues, not parties, but they tend to vote Democratic (see chart 2). In 2016, calculates Mr Frey of Brookings, people aged 30 to 44 (older millennials) voted for Hillary Clinton by ten points (55% to 45%); voters aged 18 to 29 (younger millennials and Gen z-ers) by 19 points. Millennials form the bedrock of support for the progressive left, who have done well in Democratic primary contests this year.

But will they turn out? This year, admits Ms DeWitt, “the top of the ticket won’t be a motivator.” Voters under 30 have always voted less than older ones anyway, often by large margins, though this may owe as much to political parties as to voters themselves.

In 2016 two-thirds of young voters said they had not been contacted by any party before the election, probably because parties concentrate their get-out-the-vote efforts on those who have voted before (making low turnout among the young a self-fulfilling prophecy).

“Young people are issue-based voters,” says Wisdom Cole of the naacp. “We’re not going to turn them out by just saying, ‘Go Vote! Go Vote!’.”

Pew’s Mr Fry says, “how the pandemic affects turnout is anyone’s guess.” Our guess, based on crunching Census data and polls from YouGov, is that the turnout rate for the under-30 cohort might be 11 points lower than for the other generations this November. That sounds poor, but for comparison we reckon that gap was 20 points in the 2016 election.

Turnout among voters aged 18 to 29 almost doubled between the 2014 and 2018 mid-term elections. Anecdotally, say election organisers, Gen z activists are more engaged in the 2020 campaign than older voters.

Rock the Vote’s online voter-registration platform has processed 900,000 registrations so far this year, compared with 500,000 at the same stage in 2016. It seems likely, thinks Ms DeWitt, that anger about the death of George Floyd and others will be a wake-up for the young. Disgust at Mr Trump may transcend generations.

Democrats are understandably cautious about Joe Biden’s opinion-poll lead. As 2016 showed, leads can shrink and the electoral college can let a candidate lose the popular vote but still win the White House.

But from a generational point of view, it is no surprise that the Democrat should be out in front. It reflects not only Mr Trump’s personality and record but shifts in the tectonic plates of electoral demography.

Erosion of nuclear deterrence makes India-China relations critical

Countries with nuclear weapons are moving closer to military confrontation

Gideon Rachman

James Ferguson illustration of Gideon Rachman column ‘Breakdown of nuclear deterrence makes Xi-Modi relations critical’
© James Ferguson/Financial Times

My generation grew up in the shadow of a possible nuclear war. I was born a few months after the Cuba missile crisis — the closest humanity has come to nuclear Armageddon. The Campaign for Nuclear Disarmament was a big political force as I was growing up.

My children’s generation are much more likely to demonstrate against climate change than nuclear weapons. Leading politicians also no longer worry so much about nukes. Nuclear arms-control negotiations, a staple of the cold war, have fallen into abeyance.

But this relatively relaxed attitude is having a paradoxical effect. It seems to be making countries armed with nuclear weapons more willing to risk military confrontation with each other.

There are three international rivalries where tensions between nuclear-weapons states are reaching dangerous levels. The biggest current risk is on the China-India border — where recent clashes have led to 21 Indian fatalities and an unknown number of Chinese casualties.

Military tensions are also rising between China and the US in the Pacific. Meanwhile, the crisis in Belarus has led to fears of Russian military intervention, which would put Nato on alert.

The erosion of nuclear deterrence gives rise to two distinct, but related, risks. The first is of a conventional war, which could happen if two nuclear-weapons states believe they can fight each other without the risk of nuclear escalation. The second is of a nuclear war, which could happen if a conventional war escalated unexpectedly.

During the cold war, the US and the USSR were too conscious of the dangers of nuclear warfare ever to risk striking each other directly with conventional weapons. But the Chinese leadership has taken the risk of killing Indian troops, despite India's possession of nuclear weapons — and New Delhi is pushing back.

The deadly clash in the Himalayas over the summer was only the second time that two nuclear-weapons states have fought. The first was the Kargil war between India and Pakistan in 1999.

That confrontation did not go nuclear. But it left world leaders profoundly shaken. Bill Clinton, the US president at the time, called the frontline where the two sides had clashed “the most dangerous place in the world”.

There are fewer nuclear-alarm sirens sounding this time around. Most experts take comfort from the fact that India and China both have a policy of “no first use” of nuclear weapons. But if Beijing and New Delhi’s confidence that the other side will not use nuclear weapons persuades China to press home its military advantage, then India may be tempted to alter its policy in an attempt to restore deterrence. Some experts point to the possibility of India deploying tactical nuclear weapons in the Himalayas, or formally renouncing its no-first-use policy.

Threatening to use nuclear weapons is always tempting for a country that fears it might lose a conventional war. Pakistani military doctrine envisages an early resort to nuclear weapons, in the event of an invasion by India that would otherwise lead to defeat.

Western analysts have long feared that, for similar reasons, Moscow will threaten to use nuclear weapons early in any conflict with Nato. This strategy is known as “escalate to de-escalate”. Nato planners sometimes point to a 2009 Russian military exercise that reportedly ended with a simulated nuclear attack on Warsaw. The Russian scenario was centred around a conflict over Belarus — where current civil and political unrest has led to discussion of Russian military intervention.

American concern that Russia might use smaller, tactical nuclear weapons, in any conflict with Nato has led the US to develop its own new generation of low-yield nuclear weapons. These were deployed for the first time on submarines earlier this year. They are said to be smaller than the bomb that devastated Hiroshima in 1945 — an idea that is apparently meant to be reassuring.

As well as modernising its nuclear arsenal, the US is withdrawing from its existing nuclear-arms control agreements with Russia. The Intermediate Range Nuclear Forces treaty was allowed to lapse in 2019. The Start treaty, which governs intercontinental nuclear missiles, is unlikely to be renewed next year.

A major reason that the Trump administration has given for not renewing existing arm-control treaties with Russia is that they do not limit China — which is the country the US now regards as its most dangerous rival.

Even when Barack Obama was president, I heard senior American strategists predict that there will eventually be a military confrontation between the US and China — probably at sea. Their expectation was that any confrontation would be quickly brought under control through diplomacy.

The risks of such a clash are now rising, with Washington and Beijing taking actions over Taiwan and the South China Sea that the other side regards as provocative. The obvious danger in a clash is that diplomacy fails to calm things down and the conflict escalates.

The fact that any confrontation would be seen as a symbolic struggle for primacy in the Pacific means a clear defeat might well be unacceptable to both Beijing and Washington. That increases the risk of military escalation between two states that possess considerable nuclear arsenals. No one should be complacent about how that might play out.

Here We Go Again: Precious Metals Edition 



The game the government and the financial markets have been playing for the past few years – in which stocks tank until the Fed capitulates and agrees to cut interest rates and/or ramp up QE, after which markets soar  – is usually measured in stock price terms.

In other words, the S&P 500 drops by 18% in two weeks and that is deemed scary enough to force the Fed to fire up the printing press.

But precious metals also tend to be swept along on these massive tides of hot money. In March of this year,  for instance, stocks tanked, but so, counterintuitively, did supposedly “non-correlated” assets like gold and silver.

The explanation for this is probably that when your stocks are plunging you have to raise money, and the easiest way to do that is to sell whatever is 1) up recently and 2) liquid enough to be easily moved. So you don’t sell your house, but you do sell some gold, silver, mining stocks or if you have them, precious metals futures contracts.

Then the Fed rides to the rescue and precious metals retrace their decline – and then some – on the prospect of huge new infusions of easy money.

Well, here we go again. The Fed promises low interest rates for years to come, but stocks read this as “no further cuts” and proceed to roll over. Gold and especially silver get slammed in the general rush into cash.

The following chart shows what happened in March and the replay that is apparently beginning now.

stocks and gold 2020 low-ball bid precious metals

What happens next? 

If the rules of this game still apply, stocks, gold, and silver will keep falling until the Fed and/or Congress provide another big cash infusion. 

That’s already coming on the fiscal side, as Congress debates the size of the next pandemic stimulus bill. If it includes another round of $1,200 checks for Millennial Robinhood traders, that alone might revive the market’s animal spirits. 

If not, the focus will shift to the Fed, which will be forced into some kind of “whatever it takes” stance that includes negative interest rates and possibly direct purchase of equities.

Either way, precious metals and related mining stocks – again, if the game continues – will suffer for a while and then resume their bull markets. In the mining stock universe there are literally hundreds of examples of a March collapse followed by parabolic recovery in subsequent months. 

Here’s one to whet your appetite: primary silver miner First Majestic fell from 12 to 5 in March before tripling in the ensuing five months.

First Majestic Silver low-ball bid precious metals

Now the rollercoaster is heading back down. 

This chart, along with most others in the precious metals space, screams “low-ball bid”

A Stable Euro Requires an Ambitious Industrial Policy

After years of falling behind in cutting-edge technologies, Europe now has a chance to transform its economy in the aftermath of the COVID-19 pandemic. The case for an EU-level industrial policy is stronger than ever, and the survival of the eurozone itself may depend on it.

Xavier Vives

vives12_Evgeny GromovGetty Images_EUeuroindustry

BARCELONA – The idea of a European industrial policy has been back on the agenda at least since the release of a Franco-German manifesto on the issue in early 2019.

But whereas that document focused primarily on global competitiveness, an equally strong argument for reviving industrial policy is that it is necessary for the survival of the euro.

Since the introduction of the single currency, the industrial share of the economy in terms of value added has remained stable in Germany while declining markedly in France, Spain, and Italy. Germany’s massive economic-policy response to the COVID-19 shock is bound to reinforce this tendency.

Industry, broadly construed to include digital services, is the key to increasing productivity, implying that the European Union’s southern members will need to embark upon an industrial revival. Otherwise, their relative lack of competitiveness will deepen imbalances within the eurozone, and raise the prospect of permanent north-to-south transfers, threatening the bloc’s political sustainability.

The bad news is that while France can perhaps afford to spend billions of euros supporting its auto industry, Italy and Spain cannot. The good news is that the recently adopted Next Generation EU recovery package offers an opportunity both to revive southern European industry and position it for a digital, sustainable future.

According to the European Council’s agreement this past July, “Member States shall prepare national recovery and resilience plans setting out the reform and investment agenda of the Member State concerned for the years 2021-23.” But EU leaders should now go further, by establishing clear goals for making European industry not just globally competitive but also more geographically balanced.

The focus should be on the same key sectors identified in the Franco-German manifesto: health, energy, climate, security, and digital technology, with specific initiatives in microelectronics, batteries, and artificial intelligence (AI).

While the United States and China each race ahead in pursuit of global dominance in AI and other cutting-edge technologies, Europe is increasingly lagging behind in the digital economy. Even in successful Germany, total stock-market capitalization is less than that of a single US tech giant like Amazon, Apple, or Microsoft.

Contrary to what some commentators have argued, Europe’s lack of technological competitiveness is not the result of EU competition policy, which has blocked such mergers as the one between Alstom and Siemens. Rather, Europe’s problem is that it has a deeply fragmented digital market, which makes it impossible for firms to profit from the dynamic economies of scale that digital platforms and Big Data would otherwise offer. This obstacle leaves few incentives to invest in the research and development that drives innovation.

Making matters worse, Europe also has deeply fragmented public procurement policies, owing largely to the fact that it lacks a joint defense policy. It is this fragmentation, not competition within the single market, that explains the absence of European “champions.”

In the past, European industrial policy decayed after the strategy of picking winners failed in the 1980s and 1990s. Policymakers shifted their focus to fostering innovation, training the workforce, and providing an attractive business environment. Then, the 2008 global financial crisis renewed interest in industrial policy, and now the COVID-19 pandemic has underscored its potential advantages as a means of driving competition, advancing sustainability objectives, securing supply chains, and increasing economic resilience.

The pandemic has made technological sovereignty and value-chain stability leading priorities, not just in Europe but everywhere. Both imperatives feature prominently in US Democratic presidential contender Joe Biden’s economic-policy platform, and there is every reason to believe that the operations of foreign state-controlled firms – particularly Chinese companies – will be closely monitored both in the US and in Europe in the years ahead.

Moreover, industrial policy has a crucial role to play in moving resources from declining and obsolete sectors to emerging, viable ones. Without a strategic approach, state aid to the private sector will merely create more zombie firms that should have failed.

This danger is particularly acute in the current circumstances, given the scale of emergency spending by governments. In pursuing a post-pandemic recovery, the goal of Next Generation EU and other programs should be not just to restore growth but also to transform the economy. 

To that end, industrial policies should be used to help coordinate investments. Key industries like electric vehicles depend not just on the automotive sector but also on domains ranging from AI and 5G to battery manufacturing and infrastructure (charging stations).

Achieving global competitiveness in this industry thus requires wide-ranging complementary investments, not to mention a properly trained and educated workforce. In Europe’s case, a traditional laissez-faire approach will have little to recommend it. Public-private cooperation will be necessary.  

The success of the EU recovery fund depends on coordination at the European level, following a process of careful selection and monitoring of public spending. To prevent pork barrel politics from limiting the transformational potential of the recovery, candidate projects should be evaluated and shaped by independent national agencies staffed by recognized professionals.

The eurozone needs an industrial policy that preserves internal competition while also bolstering southern European industry and upholding the EU’s commitment to open markets internationally. Otherwise, the euro itself will remain at risk.

Xavier Vives, Professor of Economics and Finance at IESE Business School, is co-author (with Elena Carletti, Stijn Claessens, and Antonio Fatás) of the report The Bank Business Model in the Post-Covid-19 World.

The House Of Cards Is Ready To Collapse

Bert Dohmen


- Bullish enthusiasm has gone on a parabolic trajectory in the month of August, guaranteeing a volatile election season for the stock market.

- Economic indicators no longer paint an optimistic picture - now, they are showing a deceleration in the recovery, coinciding with a deterioration in sentiment.

- Investors relying on the Fed to "stimulate" the markets with loose policy are being roped into a trap.

Note to readers: We published this article on September 1st, prior to the selloffs on the 3rd and 4th.

Despite new signs that the U.S.'s economic growth will be slow and painful, the euphoria we've seen take hold of markets over the past few months has now started to accelerate. Investors who are already overexposed to the stock market are loading themselves up with even more risky assets, even as we closely approach a volatile election season.

Bearish Divergences

The Put/Call ratio, which measures the ratio of bearish versus bullish options bets on the stock market, has fallen to record 2-year lows repeatedly over the past several months. This reflects the fact that speculative activity is the highest it has ever been over this period as SPY (orange line) has climbed to new record highs:

This confirms everything we've written over the past several weeks. It is increasingly important that investors consider the psychology and behavior currently driving the markets higher, and why it is unsustainable.

This week, one analyst on TV said, "We have to be comfortable in being uncomfortable. You have to stay fully invested." A major CEO of an investment firm said that he has "no doubt that by next year, the economy will be as strong as last year."

Attitudes like the ones above tempt fate and will ultimately lead investors to ruin if they increase their exposure in this market. The major indices continue to depict a distorted image of what's really going on for the vast majority of companies.

The divergences in market breadth we've previously highlighted have grown substantially larger during the month of August. Below, we have an hourly chart of the S&P 500 (red line) compared to its "equal-weighted" counterpart (candlesticks):

The two have veered off in different directions, with the "equal-weighted" version making a clear top and holding in a steady downtrend since August 12th.

Divergences of this sort typically signal that the markets are currently in a period of distribution. Large Wall Street firms have slowly and carefully unloaded their positions over the last 2 and a half months onto retail investors, who are walking into a trap.

A similar "distribution" trap was set earlier this year, just before the February plunge. A warning sign emerged when the S&P 500 began to diverge from its equal-weighted counterpart only a few weeks ahead of the crash.

Illusions of a Strong Stock Market and Economy

The narrative of a strong stock market rests upon a handful of the largest companies. The largest 10 constituents of the S&P 500 by market cap now make up over 29% of the index.

What's less known is that the largest 10 companies in the NASDAQ 100 make up over 50% of the QQQ's holdings.

While an upcoming bear market is likely to be triggered by technical weaknesses like the one discussed above, it will be prolonged by the real outlook for the U.S. economy.

Economic indicators no longer paint an optimistic picture - now they are showing a deceleration in the recovery, coinciding with a deterioration in sentiment.

The most concerning factor of all, however, is a reduction in stimulus. The Peterson Institute for International Economics estimated that fiscal aid to U.S. households will plummet by $500 billion if Congress is unable to craft a new rescue package. The result? A further 4-5% decrease in GDP.

With the last government stimulus payments being exhausted after July, the decline we're already seeing in the economic indicators will become even more severe. The effect will be felt throughout the entire stock market, although some will be hit harder than others.

In our latest Wellington Letter, we discuss various sectors of the economy which have seen the largest demand declines due to COVID-19. Many pessimistic forecasts at the outset of the pandemic predicted that airlines, commercial real estate, resorts and other hard-hit sectors would not recover until the end of the year.

Now, more than 5 months after the plunge, we know for certain the recovery will be much longer and worse than even the most pessimistic forecasts in March. Already, the number of large corporate bankruptcies has put 2020 on pace for the highest annual count on record, as shown below:

Chart showing that Covid-19 has triggered a record wave of corporate bankruptcies

The Fed's Impact

Monetary policy has grabbed everyone's attention since Chairman Powell announced the adoption of "average inflation targeting." The yield curve has steepened, money is flowing back into gold after several weeks of consolidation, and now everyone is discussing the prospects of big inflation down the road.

Is this really viable? One important factor to consider is the money velocity. This is the rate at which dollars exchange hands in the economy and is a critical factor driving inflation. The Fed, however, has very limited control over it.

The velocity of the money supply not only witnessed a steady decline over the past two decades, but saw a massive drop of over 20% in the second quarter of 2020, as shown on the chart below:

Trends like this are indicative that inflation won't be going significantly higher anytime soon.

Bulls continue to hope that the economy will recover in the same way the stock market did, which is nearly impossible. Central banks can exert their powerful influence, but that only works until investors realize that artificial credit is not a substitute for genuine economic growth.

In the meantime, we will closely watch markets for when this inevitable turning point emerges.