6 October 2011 – The Aleph Blog

The Retirement Bubble

Posted on 6 October 20117 October 2011 by David Merkel

Almost every asset funds a liability.? What gets pitched most frequently to the average American, investment-wise?? Save for your retirement.

And that’s good, mostly.? We need to save as a society, and we don’t do it.? Even our government, who claims to save for us through Social Security and Medicare, does not do it, but expends the money on current obligations of other programs.

But with so many among the Baby Boomers not saving, and with one lost decade behind us in stock investment terms, how will the Baby Boomers survive retirement?? Can they retire?? Or must they learn the phrase, “Do you want fries with that?”

I have written critically about retirement in the past. The ability of Baby Boomers as a group in the US to fulfill their dreams is limited.? They did not save enough, and asset markets offer little in the way of returns prospectively.? Interest rates are low, and P/Bs are middling.

When any bubble pops, there is a limited range of strategies.? Default, defer, reduce.

Default — things are so bad that I can’t make payments now, much less years into the future.? For practical purposes, I am broke.

Defer — things are bad, but if I wait and work longer, I can retire later than I hope for with reasonable outcomes.

Reduce — I can’t retire at the income level I thought I would, but I can retire at a lower level that I can live with.

Sadly, this is messy, with complications from inflation, and the productivity of the economy.? I expect that most older people will work to some degree in their old age, partly to make ends meet, and partly for social fulfillment, because “retirement” can be dull.

There should be no shame in this work, no matter how menial — hey, we were made to work, not relax.? There are no guarantees, and historically, no society has survived.? Thus relying on the present social compact to last is risky.? I write this as one that relies on the division of labor to support those who work in finance.? As one who has studied history, that is not the most stable place.

The concept of the retirement bubble simply means that the expectations of people exceeded their willingness to fund the future.? Also, the 80s & 90s made people conclude that retirement was free.? Put a little aside, and you have it made.

Ignore the distractions of financial assets.? If they didn’t exist, how would we live in our old age?

Our children would help us, though in the present day the incentive to have children is diminished by the low rates of marriage and fertility.? But in the present day, we imagine that we will have a retirement funded outside of ourselves.
We would save more in commodity terms, which don’t offer a lot of gains outside of inflation.
We would find places to work.? After all, we have reliable work histories, and can aid almost any enterprise because we have more knowledge than someone 40-50 years younger than us.

I could add in the idea that children might be less productive than we expect.? No great surprise for the US, given the educational trends here.? That said, we have a lot of capital investments that make our laborers far more efficient than in other countries.

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I don’t think retirement is realistic, and I am not planning on retiring, should I live so long. My Dad retired at 62, which was late in his industry, given the hard labor of installing sewers.? And that was after his brother (my uncle) died, contracting MS after a tragic accident.

In the present day, few have a hard time of it in their jobs? in North America.? For most of us, old age means limitations in our usefulness, but not an absolute limitation in our ability to work.

The US economy will retool to use the labor of older people, outside of what is considered retirement.? We’re the United States; we adjust while the rest of the world does not.

And that gives me some hope.? I expect to see older people in less skilled positions, and perhaps a greater amount of younger people unemployed.? Maybe the young people will emigrate, or maybe they will humble themselves and pick fruits and vegetables, or something like that.? I’m not trying to be mean, but so many criticize immigrants.? We would not have so many immigrants if we had children enough to do the tasks that immigrants do.

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If there is not enough income behind the growing population of elderly people to fund them in retirement, then retirement is a bubble, and shoul1d be abandoned.? Tell retirees to defer or reduce their retirement goals.? If they can’t even make on that level, tell them that they have to work until they die.? A sad concept, but true for most of humanity so far.

I’m not trying to be mean.? I am just looking at existing structures and asking how do we support the elderly in the US.? It is not an easy question.

On Investment Contests

Posted on 6 October 2011 by David Merkel

I received a question from a friend of mine and want to give an answer:

Background: I teach high school physics.? In my AP class, I have some cross-registration with the Micro-econ & Personal Finance classes.? In those classes, they play the “Stock Market Game” in which they’re given $25k and compete for the semester for the highest total.? Inevitably, discussion of economics, stocks, and that game finds its way into my class where I am incapable of _not_ getting involved.

Problem 1: The game only lasts for a semester (4 months).? Result: very short term thinking

Problem 2: The teacher pushes stock-chart reading, “200 day average vs 50 day average”, looking at price movements, etc.? There is little (if any) balance sheet reading, company growth investigation, or stock price evaluation going on.

Relevance for here: The kids immediately turn to penny stocks thinking to make a quick buck- “If I buy 50,000 shares of this company at $0.25, I can sell it for a huge profit when it goes up to $0.50.

Question: Do you have any recommendations for short quips / talking points to reveal their folly to them??

(I had a kid last year almost not graduate when he became so enamored with playing the stock market that he thought he could “crack the code” and make a fortune off penny stocks.)

I have only experienced one good investment contest in my life.? It was in 1983-1984, when Value Line sponsored a contest offering significant prizes.? They did something unique: they divided the market into 10 groups sorted on volatility, and told investors that they had to pick one stock out of each of the ten groups.

Brilliant. this eliminated the ability of people to just pick risky stocks, and bet on getting lucky turning the whole thing into chance.

A portfolio of ten equally-weighted stocks demonstrates more ability than a single pick.? For any single stock, or concentrated portfolio that does well, the answer should be that they got lucky, as humans see it.

As it was, in the Value Line Contest, I finished just short of getting a prize.? My returns were less than a percent behind the lowest winner.

Now as to what you should do, dear friend, in the short run, momentum matters more than valuation, most of the time.? The teacher may be giving them the right advice for the contest.? Personally, I would go to the teacher, rather than the students, and tell him to do a contest more like Value Line did.? If he needs help with the volatility groups, I can provide the data.

But the two main things to point out on penny stocks is this: 1) Most people investing in penny stocks lose a lot of money, because the stocks seem cheap, but they have little in assets or earnings relative to their price.? 2) There are penny stock promoters who tout penny stocks so that others will buy at a higher price, so they can sell to them, and the new buyer can experience the losses.

If the contest is structured properly, it should have a minimum capitalization limit, and a diversification requirement.? Tell the other teachers to consider this.