Letter #35: Stan Druckenmiller and Geoff Canada (2013)
Duquesne Founder and Harlem Children's Zone President | 2013 Bowdoin College Presentation | Generational Theft
Hi there! I go by KG, and I love studying the history of business and investing. I’ll be sharing some notes from one Investor/Shareholder letter per weekday (mostly from my compilations) here.
Today’s notes are on the 2013 Stan Druckenmiller and Geoff Canada presentation at Bowdoin College titled: Generational Theft. You can watch the entire thing here. These are my notes. Some additional thoughts/takeaways at the end.
*Note: This email is image-heavy. If you can’t see any charts, I recommend reading it on my actual substack website. You can also find it on my blog here.
Notes
Entitlements:
Webster’s: A right you have under the Law
Actual: A benefit that people have under the Law that they don’t have to provide a current service for
Income Supplement (lots of Press, but not really anything)
Unemployment insurance claims
Food stamps
Three Main Buckets (big big money) – Primarily for the Elderly
Medicaid: Income based (70% goes to elderly)
Social Security
Medicare
Druckenmiller started worrying about entitlements in 1994
In 2011, the baby boomers, the front end of what was going to turn 65, and there would be a huge surge in entitlement payments
Whats the demographic issue?
Chart 1: Federal Government Entitlement Transfers as a Percentage of Federal Budget Outlays
NATION OF TAKERS
Services/Benefits people get while not providing a current service
1960: 28% of Federal Outlays
2010: 68% of Federal Outlays
Used to be 1/3 of Defense, now much more
Biggest increase took place in Nixon, Ford, GWB admins (NOT a partisan increase)
Elderly taking a bigger and bigger share even BEFORE baby boomers reach that age
Chart 2: Benefit per oldster/GDP per capita
THE LEVEL OF GENEROSITY TO THE ELDERLY HAS ALMOST DOUBLED IN THE LAST 40 YEARS, UNSUSTAINABLE
Benefit/Oldster has grown MUCH quicker than GDP per capita since the 70s
1970: 41%
2010: 72%
Chart 3: Average Consumption by Age Group
YOUNG’S CONSUMPTION IS UP 38% IN 30 YEARS, WHILE THE OLDS CONSUMPTION IS UP 164%
People receiving outlays are about to explode
1960s: 20s consumed much more than people in their 70s
1990s: 70s consumer much much more than people in the 90s
AARP taking money from you and giving to the elderly
Chart 4: US Poverty Rates by Age Group
POVERTY RATE FOR THE ELDERLY HAVE COLLAPSED, NOT SO FOR CHILDREN
Elderly: 35% -> 9%
Children: 25% -> 21%
Minority Children: 31% -> 35%
Massive wealth transfer from young to elderly
Chart 5: Average Children per woman
FERTILITY RATES HAVE GONE DOWN DRAMATICALLY
Fertility Rates:
1950s: 3.7
2011: 2.06
In 1957, there were 100MM less people in the US, and they were having more babies than we are today
Those babies are about to become seniors, who have been taking more and more, and there are a lot of these babies about to become seniors
Chart 6: US Life Expectancy at Birth (Years)
US LIFE EXPECTANCY HAS GONE UP SHARPLY
1900 to Now
Men: 47.9 -> 74.9
Women: 50.7 -> 79.9
Not only will there be MORE oldsters, they will be around for a much longer period of time
Seniors:
A) Bigger Share
B) More of them
C) Taking for a longer period of time
Chart 7: Federal Spending by Entitlement’s Program (% of GDP)
THE ENTITLEMENTS PROBLEM IS JUST BEGINNING
Percentage of GDP
3 Buckets: MMSS
Now to 2050: 10% to >20%
Historically, tax revenues as % of GDP have a ceiling around 20%
Entire tax revenues will be going to people who don’t even provide a service
Chart 8: US Population Ratio: Working Age to 65 and Over
DEPENDENCY RATIO IS JUST STARTING TO FALL
By 2030, there will be HALF the amount of young to support the old
Working age: 18-64: Grow 17% from 2010-2050
Elders: 65+: Grow 102% from 2010-2050
4.8 workers supporting elders
2030: 2.9
2050: 2.4
Huge recipient pool, less people giving money to
US Centenarians (Thousands) are the fastest growing age population
Oldsters growing at 102%
85+ growing at 343%
100+ growing at >1000%
Spend A LOT more on medicare than people in 60s and 70s
Chart 9: The True “Fiscal Gap”
IF TAXES RATES AND THE LEVEL OF GENEROSITY IN ENTITLEMENTS PROGRAMS REMAIN THE SAME, WE HAVE A MASSIVE PROBLEM AHEAD. EITHER TAX RATES RISE OR GENEROSITY FALLS. THERE IS NO ALTERNATIVE
Total Debt (On the Books): 11Trillion
Fiscal Gap: 211Trillion
Expected tax revenues – present value of benefits promised
Labor: Pay a payroll tax: supposedly to pay social security and future medicare: but it doesn’t pay for you, it pays for the current elders
All you have is a promise you’ll have some
Deficit: 10% of GDP, actually 15% of GDP
Chart 10: Federal Taxes/Expenditures
THE COST OF WAITING IS ENORMOUS
The increase in federal taxes and expenditures needed to cover fiscal gap today is much lower than in 40 years
Increase in all federal taxes:
Today: 64%
20 years: 77%
40 years: 93%
Decrease in all federal expenditures (defense, entitlements, etc)
Today: 40%
20 years: 46%
40 years: 53%
Chart 11: Raising taxes on the rich is not the solution
10%, 1000bp Rise is Millionaire Tax Rate: $92B
2010 Deficit: 1.3Trillion (not including off balance sheet)
At 50%, every day you work until June 30th, all your income goes to someone else
You don’t get anything till July 1st
If you tax the rich, they:
Stop working
Move
Even if you get the money, it doesn’t move the needle
Chart 12: 2011 US Defense spending exceeded the 13 next highest defense budgets combined
USA: 711B
China: 130B
Entitlements growing MORE than 711B, so if you cut 100%, still screwed
Chart 13: Net worth by age of household head in 2007
LOWER CAPITAL GAINS AND DIVIDENDS IS A DIRECT TRANSFER FROM YOUNG TO OLD
20-34: 100K
65-74: 1MM
Chart 14: US Consumption by age (ratio to labor income ages 30-49)
THE BIASED GROWTH OF THE WELFARE STATE
1960:
X-axis: Age
Y-axis: What the average 30-49yr old makes in
90yr old is spending 138% what 40 year olds makes
Spending 2x what 30 year olds spend
Lots to keep elders alive an extra 5 days
Chart 15: National Health Spending across countries
AN ADDITIONAL PROBLEM OF INEFFICIENCY. US not even close to any other country
US: 17.6
Average: 9.5
Chart 16: Despite spending 2x average country, health outcomes are bad
Spending the most, yet near the bottom for health outcomes
Why? Screwed up system: Malpractice insurance scam of an industry
Lawyers taking a bigger bite from physician income – NOT the biggest problems
Incentivizes hospitals to run insane (10-15 tests) that studies have shown don’t actually make an impact on end result
CYA policy (cover your ass)
Medical bills all done through insurance – people have no idea what they pay
HAVE TO force people to shop (aka know the prices), otherwise things won’t improve
Chart 17: US National Saving and Domestic Investment Rates (%)
AGING HAS COME WITH MORE CONSUMPTION AND LESS INVESTMENT
Some Additional Thoughts:
As of this post, it has been 6 (7 for substack readers) years since Druckenmiller went on his college campus tour. Unfortunately, it appears that he was unable to inspire the youth to go out and fight for their future.
Interestingly, the Medicare and Medicaid have been core issues that politicians have been campaigning around. However, there has yet to be a convincing payment proposal. The wealth tax in particular has been a central focus for the Democratic Party in the run-up to the 2020 election.
It is increasingly clear that the ElderTech market will be far bigger than anyone imagined. However, there has yet to be a majorly-funded ElderTech startup, nor the establishment of any ElderTech venture capital funds/teams.
Historically, America has hidden (or solved, depending on who you ask) its demographic issues by taking in immigrants. However, since the 2016 US Presidential Election, relying on immigrants is becoming less and less likely, whether that be for blue collar jobs or white collar jobs.
America’s demographics seem to be following in the footsteps of Japan, Korea, the Scandinavian countries, and many other countries: less babies, less immigration. Will this lead to a stagnating US economy?
Given the increasing Elder population and shrinking Youth population, it is more important now than ever to invest in our children. Currently seeking out children/education-focused startups.
Note: Thought of the Malthusian Trap and a running out of resources. Similar to the industrial revolution, the implementation of AI will likely increase human productivity by leaps and bounds. But will it be enough?
Wrap-up
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