I saw an article the other day about this retired couple that was downsizing to a smaller home. So they had an estate sale for the excess stuff, but it sold for pennies on the dollar, if at all. Baby boomers make up a quarter of the US population. If they are selling their $500k-$1m homes and cashing out their $800k-2m retirement portfolios in mass over the next 20 years, is there any hope for the stock and housing markets? What offsets this?
Well, there might be a strain of flu that kills them off. All of a sudden, Social Security payments are not needed anymore and the budget deficit problem goes away. Starving kiddies get capital and can invest.
mass immigration whereby ~1-2B or so people come to the western world in the next 50 years. we either offer a piece of the pie, or watch the pie get smaller. the only way to fight aging’s effect on GDP growth is to introduce a younger population. lord knows we aren’t going to breed like we used to so just open the floodgates.
Be careful of ‘drama’ investment analysis. 90% of analysis on the web (and almost 100% of CNBC) is there to be interesting (pronounced dramatic) rather than useful. Boomers aren’t going to be withdrawing everything or changing their lives all at once. It will be a gradual shift in asset allocation and disbursement. Deeper analysis may show opportunity in some sectors/structures and a hurdle in others, but you’re not going to hear a big whooshing sound as trillions get sucked out of the market at once.
joes’ go it. another thing to remember is that those withdrawals from savings will go directly into consumption which in turn means job creation and corporate profits, which drive tax revenues, which drive benefit disbursement, which drives consumption which drives job creation and corporate profits, thus the immigration solution. yes, the high end of the RE market may see some turmoil, but the low end should see some solid support, if we head down the immigration route. though, the high end may be fine due to the earlier than usual rise of the U.S. born GenXers and GenYers U.S. who will become the managers of all these new immigrants and will also be receiving huges estates built up by boomers.
Generally, the idea is that if boomers are planning to leave inheritances to kids, they should be investing with time horizons relevant to their heirs rather than themselves. So fixed income will increase as boomers require more income-generating assets, but they won’t necessarily rush out of equities entirely because they really do need to have a long time horizon even if they are themselves closer to the end than the beginning. Of course, that assumes that baby-boomers aren’t completely selfish and decide that they want to blow it all on themselves before they go out. Their historical record of selflessness is a concern. The last time the boomers seemed to care about people other than themselves was in the 1960s.
Also, rich old people like to gift their wealth to descendants - either by buying stuff and giving it to them, or by just giving cash. So either Generation X buys a bunch of stuff, or Generation Y gets more money, which they use to buy a bunch of stuff.
MattLikesAnalysis - I don’t think the consumption level of boomers would change because they just hit retirement. The source of funds (i.e. investment, not wages) would change. Besides, even if this were to push up earnings, the market may trade at a lower multiple, no? bchadwick - even if they do pass along some of the wealth to the kids, on average most will be spent, no? If a boomer retires at 60 or 65, he might live another 30 years. Plus health care, especially at the end. joehogue - right, I did say over 20 years in the question. I’m not saying the market will crash, I’m just saying that this seems like a pretty big hurdle to getting your 6-7% on average. MattLikesAnalysis - the immigration issue is interesting. Something needs to offset the declining birth rates.
Yes, good point. I’d forgotten to consider that the money retired from investment would likely be spent on consumption. So as long as it’s not spent on imports, it should cycle back elsewhere. So the major effect on stocks will likely be the shifting weights between stock and bond investments as boomers age. Prices will go down because of total demand, but returns might actually increase due to a higher equilibrium equity risk premium (assuming gross consumption does not decline radically).
naturallight Wrote: ------------------------------------------------------- > MattLikesAnalysis - I don’t think the consumption > level of boomers would change because they just > hit retirement. The source of funds (i.e. > investment, not wages) would change. Besides, even > if this were to push up earnings, the market may > trade at a lower multiple, no? well the idea is that you have the largest bubble of the population moving from saving to spending. in aggregate, you should have a lower savings rate than the years when boomers were working. greater consumption means higher profits, higher profits means more buybacks, more buybacks means fewer outstanding shares. sure, there will be less capital in future as there is lower savings, but on a per share basis, everything should be the same-ish. i would expect greater pressure on house prices as many boomers will end up “spending their house” but this house to food converstion will help non-housing corporations. of course this is looking at the US and the west in a vacuum but i’m sure the increasing wealth of EM populations will help support our capital and fill in any gaps created from our aging populations… at the right price.
^ I completely agree that the savings rates will drop, but I don’t follow how consumption increases. Aren’t these baby boomers already feeding and clothing themselves, living in houses, driving cars, etc? Why would any of that change b/c they retire? If anything, one could argue that consumption drops slightly since retirees are often on a fixed income (i.e. downsize their home). The only thing that supports your argument of increased consumption would be more luxury items such as travel, but I don’t see it being that significant.
The composition of spending will change as boomers retire (more on travel, more on medical, etc., less on work attire, housing construction, etc.). Money is either consumed, saved, or invested, or taxed. That which is consumed will feed into revenues for businesses that provide consumption goods, and to the workers and capital providers in that business, who presumably, aren’t retired. The division of those revenues between capital, labor, and raw materials providers will affect whether this process aggravates or ameliorates social inequalities and who actually gets richer or poorer from this, as well as which sectors of the market will get this growth, but aggregate consumption should not change enormously. At some point, extreme inequality leads to insufficient consumption of non-survival goods to support business and can restrict aggregate growth.
MattLikesAnalysis Wrote: ------------------------------------------------------- > > well the idea is that you have the largest bubble > of the population moving from saving to spending. > in aggregate, you should have a lower savings rate > than the years when boomers were working. Are the boomers actually savers though?
Yes, they force the post-boomers to save for them (though it manifests itself as taxes on future generations and the erosion of real wages, rather than savings in the traditional sense).
BValGuy Wrote: ------------------------------------------------------- > ^ I completely agree that the savings rates will > drop, but I don’t follow how consumption > increases. Aren’t these baby boomers already > feeding and clothing themselves, living in houses, > driving cars, etc? Why would any of that change > b/c they retire? If anything, one could argue > that consumption drops slightly since retirees are > often on a fixed income (i.e. downsize their > home). The only thing that supports your argument > of increased consumption would be more luxury > items such as travel, but I don’t see it being > that significant. if you open the border to immigrants, which is necessary to maintain GDP growth as boomers retire, the population will grow, yet the % of those who are retired will still increase as a % of population. i.e. those who are net consumers are greater than before. so if GDP is increasing and the savings rate is dropping, this translates directly into an increase in consumption (but of course there are many other factors, bchad could elaborate more eloquently). kind of a backwards way of thinking, but you have to assume governments will do anything to continue to increase GDP lest see borrowing rates increase dramatically in all facets of the economy. most simply stated, over the next generation or two, capital wealth will be converted into liquid wealth for consumption due to the boomer drawdown of capital. if the borders were closed, this drawdown of capital would result in never before seen deflation, but if they’re wide open, the current working population + new working immigrants should be able to support prices. problem is that the working population has limited wealth and ability to save relative to boomers so savings rates will not be supported by the influx of new immigrants. also, new immigrants tend to have large families (this is not being prejudice, its actually a fact) which will put a strain on the savings rates’ ability to climb and increase the consumption to income ratio. the working population today has most of the capital whereas the retired population has little. as boomers retire, the amount of capital per capita held by retirees will trend up over time and the amount of capital per capita held by workers will decline. its a dynamic machine as there is wealth transfer through death and consumption. policy could get in the way of what i’ve described above but chaos can be averted by getting familiar/comfortable with the idea of increased immigration.
I thought the Obamacare “death squads” were going to take care of this problem.
MattLikesAnalysis Wrote: ------------------------------------------------------- > > most simply stated, over the next generation or > two, capital wealth will be converted into liquid > wealth for consumption due to the boomer drawdown > of capital. I agree with the conversion of capital wealth to liquid wealth argument, but I still fail to see how consumption increases. In fact, the more I think about, I think you’ll actually see decreased consumption overall (more healthcare consumption but less in many other areas). The conversion from capital to liquid wealth is simply a substitute for previously earned wages, but are the spending patterns (consumption) really going to change b/c of retirement? I thought it was normal to expect your retirement income to be some percentage (75-80%) of your pre-retirement earnings. I guess where I’m coming out in this discussion is that there will likely be much lower returns on equities going forward as the immigration trends that you note are very likely to be offset/mitigated by these baby boomers pulling their $$ out of the market (or redirecting to less risky assets). Maybe this ties into the thread on equity risk premium…should this be a consideration of a lower ERP going forward and rendering the historical ERP meaningless?
Retirees may consume less than active workers, but let’s think about what happens. If retirees consume less, then their investments won’t be drawn down as fast as they would if they were consuming at full power. So equities won’t decline as much, except to the extent that they shift to fixed income to provide income instead of capital growth. What happens to the funds that they do end up consuming? They will be drawing down their investments in order to finance their consumption, but where do these funds go? They go to businesses that are providing whatever goods they are consuming. For younger retirees, that’s probably more leisure types of stuff. For later retirees, that’s probably more medical type stuff, although everyone’s probably consuming lots of drugs, whether for leisure or for medical purposes. Again, the arrival of large numbers of retirees will definitely change the sectoral composition of consumption. OK, once the retirees spend their money, that money will go to one of four places: 1) pay workers (non-retirees) who work at producing whatever the retirees consume; 2) pay other companies who supply raw materials for that consumption; 3) pay capital providers (investors) in those companies, who are spread across society; 4) taxes (though maybe we won’t have corporate taxes anymore). So the money will cycle to 1) non-retirees (workers) 2) investors (retirees and non-retirees) 3) government (taxes) 4) other companies (which is just step 1-3 recursively) The one issue is that consumption that goes to imports does not come back through routes 1 and 3 (but might partially cycle back through route 2). So medical outsourcing is a big risk to the US economy.
BValGuy Wrote: ------------------------------------------------------- > ^ I completely agree that the savings rates will > drop, but I don’t follow how consumption > increases. Aren’t these baby boomers already > feeding and clothing themselves, living in houses, > driving cars, etc? Why would any of that change > b/c they retire? If anything, one could argue > that consumption drops slightly since retirees are > often on a fixed income (i.e. downsize their > home). The only thing that supports your argument > of increased consumption would be more luxury > items such as travel, but I don’t see it being > that significant. Yeah, I agree. If a working boomer is making 100, spending 60, and saving 40, when the boomer retires, he will still probably be spending 60, maybe less. The change is that he doesn’t have the wages of 100 anymore.
Interesting point… if he doesn’t have wages of 100 anymore, is that good or bad for the economy. If his job really wasn’t providing 100 units of good stuff in the economy, and actually only 80, then - if his replacement is either replaced at 80 or is delivers more like 100 units of value to the economy - the economy will become more productive. I think this could be a very powerful argument for continued growth. If the retirement of baby boomers succeeds in reducing “dead wood” in the economy… people who, through seniority, have managed to command compensation in excess of what they are worth, their retirement could actually be really good for profits.