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Investing and Demographics

I read your blog frequently, and I always find it very insightful and realistic, and without invective, which is refreshing. I’d like to pose a question to you, to which you can probably provide a good answer.

Given the current pessimistic mood of the U.S. economy and financial markets, I’ve been trying to figure out where the light at the end of the tunnel will be for U.S markets. But I get stuck at this point: Baby Boomers retiring. Their portfolios are the ones that have grown over the past 30+ years, and they will soon be drawing upon those savings as a source of income at a steady rate, and one that allows them to live at similar quality of life as when they retired. I have read plenty (I think) on the current state of Social Security, but I’ve seen nothing on the private pillar of retirement.

This future, steady drawdown must have some effect on U.S. equity markets, correct? Enough to keep markets moving sideways? Downwards for the long-term?

As an early 30-something who has been financially responsible (no consumer debt, no mortgage, high savings rate), I’m trying to figure out what might happen to my savings long-term, and how heavily a portfolio should be weighted with U.S. securities.

Could you possibly point me in the right direction where I can find some literature or statistics on how Boomer’s retirements will affect U.S. markets?

So went a recent question from one of my readers.  I’ve been studying this topic for 20 years, and writing about it for 15 years.  The questions are difficult, and the answers are not clear.  Let me point you to one thing that I have written on the topic: Society of Actuaries Presentation.

The US is bad off demographically, but most of the rest of the world is worse off.  The US has a problem because it has not been saving, but that is largely because much of the rest of the world is neo-mercantilist, and is subsidizing export industries, and the US buys.

Remember the lesson of the mercantilist era: the consumers won.  Those that tried to get gold got gold, and at a high cost in terms of other goods.  In the same way, the neo-mercantilistic nations are sucking in dollars that are worth less and less.  On page 32 of my presentation, it is amazing that the net debt position of the US has been flat, because our debts are worth less dur to the decline of the dollar.  What a boon it is to be the world’s reserve currency.

Now, as for the “retirement” of the Baby Boomers: there will be some stagnation in our equity markets to the degree that retirement causes liquidation of assets.  That said due to low savings rates, it is quite possible that retirement dates will be extended for most Baby Boomers.  They will need to labor longer, and they should do so, after all, at age 65 the average retiree is not within ten years of death.

To the extent that this causes labor shortages, the US will see greater employment prospects for its people.  In Japan that seems to be happening now.  But America welcomes immigrants (legal or illegal) in a greater way than most countries do.  That will mute any gains for unskilled labor in the US.

My advice for you is to look at global demand.  Rather than looking at investing with countries as a first screen, consider it through the lens of industries.  Look to which industries are benefiting from increased global demand, and if they are at reasonable valuations, buy them.

I know this is not a full answer, but it is the best medium-to-short answer that I can give you.

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4 Responses to Investing and Demographics

  1. maynardGkeynes says:

    Jeremy Siegel (Stocks for the Long Run) offers a pretty thorough and generally optimistic take on the Baby Boomer retirement issue in his latest book “The Future for Investors.” At the risk of oversimplifying a complex analysis, Siegel’s bottom line is that while there are not enough younger generation Americans to absorb the Boomers stock and bond assets at current prices, investors in emerging countries, like China and India, will more than make up for that and will end up buying the Baby Boomer’s paper assets as the Boomers sell them off to fund their retirements. The upshot is that foreigners will end up owning a lot of our companies by the year 2050. A potential snag, says Siegel, is whether America will be willing to let this happen, or will pass laws or adopt polices to discourage the transfer of US assets to foreign countries. This remains to be seen, but he is optimistic. On the other hand, the implications for the typical Baby Boomer’s most important asset, his or her house, is rather dire, because homes can’t be sold as readily to foreigners, for obvious reasons. Siegel doesn’t provide an answer for the housing market, which is outside the scope of a book on stock investing in any event.

  2. matt says:

    Can you please reconcile these two seemingly conflicting statements:

    “[Boomers] will need to labor longer, and they should do so” and “To the extent that this causes labor shortages, the US will see greater employment prospects for its people”

    If they work longer, there won’t be labor shortages (perhaps intergenerational warfare, instead).

  3. Hans1 says:

    I have been wondering about boomers for some time. I believe the majority of them have negative net worth, and will pass on leaving large balances due on their mortgages, car loans and credit card bills. This will produce more losses the banks will have to deal with.

    Some will even game the system, running up larger and larger balances knowing full well that they will never be paid down.

  4. Mark says:

    David (and reader),

    The answer lies in the Modigliani-Brumberg Life Cycle Hypothesis, of which the core component is consumption smoothing. It is interesting you mention Japan, b/c they have practically become the case study as to how declining saving rates can result in significant economic declines spanning generations. Demographics have played a key role in the economic disparities of Japan’s saving rate. Paul Krugman is a great resource for this subject and he connected the link between Japan’s declining birth rate and the aging society, leading to a decreasing population of the workforce. Meanwhile, the amount of people at the age of retirement continues to increase. Japan’s population, income and savings indicate that Japanese consumers should be forgoing consumption and instead saving in efforts to support the increasing number of people in retirement. However, given the declining number of younger consumers that should be at peak utility, there is an imbalance between those that are saving more for consumption later and those who are consuming what they should have previously saved. This story goes on and on, but we can easily compare Japan’s position approx 25 yrs ago to the US today. However, if the US finds itself in a situation in 25 yrs where Japan is today, the global effects will be much more extreme and for people in my generation (and the reader who posed the question), there is indeed plenty of reason to be concerned.



David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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