Boomers and Assets, Part II

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From yesterday’s blog, jrf29 writes:


Chris, I’m not sure I understand this. How could baby boomers
outnumber the generation behind them? Total fertility rate for the
baby boomers is projected to settle around 2.1 (approximately equal to,
or just slightly below, the replacement rate).

The fact of the matter is that there's a "hole" in the demographic profile right behind the boomers.

The chart below is not a "rate chart". The length of the bars corresponds to the numbers of people broken out into 5 year age increments. The longer the bar, the more people it represents.

We can state, unequivocally that there are more boomers than there are people in the cohort behind them.

See that pink box (below)? That represents the boomers. There are more of them than there are people in the next set of three bars.

Now look above the boomers. See that nice, smooth triangle shape? When the boomers were acquiring their financial assets they were buying them from a smaller pool of people.

Some have posited that this partially explains the 20 year bull market in bonds and stocks where prices were driven to historical extremes where they remain to this day (the recent pullbacks in stocks notwithstanding).

The logic here is that people's earning power is not constant but peaks between the ages of 45 and 55.This means that as boomers approached their peak years of earning and associated acquisition of financial assets, they were buying them from a smaller pool of sellers.

What is considered an "acceptable p/e for stocks" has crept up almost in lock-step with boomers earning power, raising the possibility that this view is less indicative of a new appreciation of risk and reward and instead a simple case of supply and demand.

Interestingly, the forward p/e in stocks is still around 20, if we use S&P's forward estimate of earnings. That's too high by historical measures, but not recent standards. Will this view change? That's worth pondering.

This "normal" valuation for stocks is not at all normal, and I strongly suspect it reflects the relative buying pressure imposed on stocks during the long sweep of boomers advance into their peak earning (and savings) years.

Back to the chart and the notion of peak earning years.

Boomers are not really going to be selling to all the people behind them, but principally to the cohort right behind them, because those are the people in their peak earning years.

And boomers outnumber them...by a hefty margin.

Hence, my statement that there will be more sellers than buyers.

Of course, this dynamic will only be exacerbated by the extent to which Social Security and Medicare promises are not kept.

The notion of "building wealth" by holding financial assets that will inevitably gain in price is quite possibly an illusion propped up by having an appropriate demographic profile (a nice fat pyramid) and not something we can simply take for granted. We may yet discover that financial asset appreciation depends more on demographics than we suspect.

An intriguing clue is provided by Japan, ten years in front of the US with their own demographic bulge, which has not managed to recreate the former glory days of their stock market despite some sophisticated (if not heavy-handed) financial intervention, raising the prospect that the issue was not one of finance, but of aging.

This is a companion discussion topic for the original entry at https://peakprosperity.com/boomers-and-assets-part-ii-2/

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Thank you very much for the explanation, Chris.

[quote=cmartenson] An intriguing clue is provided by Japan, ten years in front of the US with their own demographic bulge, which has not managed to recreate the former glory days of their stock market despite some sophisticated (if not heavy-handed) financial intervention raising the propsepct that the issue was not one of finance, but of aging. [/quote] This is particularly interesting.

Thanks again for taking the time to answer my question!

3

Wow, Chris, these last 4 posts (or 2 + follow ups) have been fantastic.

Isolating key parts of the Crash Course and presenting them for further analysis and scrutiny really reinforces what might not have sunk in or stood out apart from all of the other concepts in the full video. I personally think that this type of post to be quite effective for several reasons…

An analysis of individual concepts or chapters can help readers understand them better and discuss their importance and relevance in their individual lives in turn boosting confidence as they become better versed in all aspects of the Crash Course. The generated dialogue highlights areas that might need further clarification which both readers and yourself have done an excellent job addressing. The results of which I think could be quite useful in the planning and production of the next generation of the Crash Course that is already in the making.

Perhaps you’ve already thought of this and that’s where this is headed? Either way I hope this trend continues and look forward to reading more.

Thanks so much for all of the hard work you’ve put into all this.

 

4

From yesterday’s blog, jrf29 writes:

Chris, I'm not sure I understand this. How could baby boomers outnumber the generation behind them? Total fertility rate for the baby boomers is projected to settle around 2.1 (approximately equal to, or just slightly below, the replacement rate).

 

jrf29,
Were you originally querying why the bulge for people who were aged about 30-50 (in the year 2000) represents a greater number of people than those in the skinnier section below it, ie, people aged about 15-30?
If you’re weren’t then perhaps this can be a clarification anyway.
The bulge simply shows that the ‘baby boomers’ (those in the bulge) had less children than did the generation before them and the generation after them. It is not explicitly referring to birth rates, although it can give an indication of them (discounting mortality and migration).
Cheers,
John

5

Chris- Thanks for the follow-up. I have read several places over the past few years about the "slimness" below the boomer bulge, but I have not focused on the slimness above. Also, thanks for not proposing the Harry S. Dent solution – the way to prosperity is to breed more. Either we become a lot more humble or we bring in immigrants in our old age to look after us. We will certainly have plenty of empty houses and empty rooms for them to occupy.

6

Does anyone know of good studies comparing US to Japan demographics and economic impacts?

The charts I found at these sites seem to confirm that Japan had a population bulge 10 years before the US:

http://www.nationmaster.com/country/ja-japan/Age-_distribution

http://www.watsonwyatt.com/news/featured/wef/japan.pdf

Japan actually has a declining population right now; does that tend to make their short term situation worse than it would be in the US?

Here’s census data that looks like CM’s chart above:

http://www.censusscope.org/us/chart_age.html

 

7

Boomers seem to have other nations to sell their assets to. The Chinese do have a significant population and do need something to buy with all of their US dollars.

8

Mmm, many boomers in this forum, I gather? The lower future value of assets may have a silver lining: someone will be able to buy them for less.

If in the near future there are houses, dryers and snowblowers enough to go round, that’s great! Then the labor of the post-boomers can be used for things that ARE needed, like renewal of America’s infrastructure, moving to renewable energy and ehh… health and social care for old people!

As I understand it, the boomers are simply going to pay later in their lives for their previous consumption. They don’t have as much as they may now think they do. But for those that came later, things look better. We may finally get to own a decent house.

9

For Gen-Xer’s like me, in one of the narrow bands after the baby boomers but before the baby boomer’s children, I’m trying to figure out how it will play out. Seems like we’ll have a higher per capita burden supporting the baby boomers in retirement. But I’ll get to buy their assets at a lower price, which I can sell for more to the wider age groups that follow me? Not that I’m focused on me, I’m just wondering which generation gets hurt more; maybe we all do but at different stages in life.

Seems like it would work out if we save in good times and spend in bad, but the problem is we spend in good times and spend even more in bad times.

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But I'll get to buy their assets at a lower price, which I can sell for more to the wider age groups that follow me?

Only in nominal terms. However, since wages have been essentially static, and since any existing net wealth in the form of assets is probably worth substantially less for the buyers as well (who probably had less to begin with), the relative price is not likely to be any more affordable than it was before $5+ trillion went "poof!" In short, you may or may not have more "dollars", but there is a significant question as to whether you would have more or less real buying power.

Selling things for more money to the age groups that follow us assumes growth (with the required inflation and debt), so that future generations always have more disposable income. Growth itself is dependent upon increasing amounts of available cheap energy. However, our future energy outlook is (to put it mildly) not one of increasing cheap energy. I’m not sure that long-term bets on long-term growth are necessarily a winner. As the Crash Course so nicely describes, this type of system is exponential by nature and, fundamentally, unsustainable.

And that doesn’t even get into all the issues related to debt, de-leveraging, etc.

Seems like it would work out if we save in good times and spend in bad,
but the problem is we spend in good times and spend even more in bad
times.

Savings is actually a drag on a growth economy. Growth economies are based on consumption (increasing). Money that is saved does not generate consumption (or, maybe more accurately, does so with a lower velocity). Because growth requires increasing consumption, we have been indoctrinated by economists, government, and media to spend. And you are right, we do. For what it’s worth, look for national savings rate to bump up to the 5-7% over the next few years, as the American consumer has been seriously seared. Now, if you are in a period of deflation, then cash is king, because prices are always falling. Of course, if nobody buys anything, then this reinforces the deflationary spiral into a potentially devastating depression. This is the boogie man in the closet of virtually all central bankers and the thing they will most try to avoid. Their only tools for this are low interest rates and increasing money supply. They are doing both. In spades. It will continue.

Generally, for the individual, saving is probably a good call, assuming that there is sufficient income to allow for saving. The form and allocation of those savings is a reasonable point of discussion. It’s hard to say whether savings is really good or bad for the economy in general because the economy is so completely messed up, both in its theory and in the current theory’s reality.

 

Brian