As 78 million baby boomers head for retirement, they will be faced with the challenge of saving like they’ve never saved before. Where are all those savings going to go?
In a recently aired Taipan Publishing Group web summit, Zach Scheidt and I talk about the “Consumer Shockwave” and its long-term impact on various areas of the market.
One of the key charts we cover is this one, the long-term consumer savings rate:
What you see here is the multi-decade decline of U.S. consumer saving habits. For the better part of a quarter century, Americans found less need to save with each passing year.
The flipside of this savings decline, of course, was an epic spending boom. People saved less because they bought more – all too often on credit.
As the boom rolled on, credit lines were maxed out; we bought as much “stuff” as we could get our hands on. The savings rate even went negative at the height of the housing bubble – not because people were feeling cash poor, but because homeowners across the land felt gloriously flush.
A Time to Save
To everything there is a season, Ecclesiastes tells us. Now the long Indian summer of American consumption has passed. The winter of our discontent is here – and that means it’s time to save.
Over the next decade, if not longer, consumer savings rates will rise. After falling below zero at the lowest point – as Americans spent all they earned and then borrowed on top of that – the only feasible direction is up.
This, in large part, is why the markets are in a funk. Consumer confidence hit an all-time low in October, as buyers went on strike against big-ticket items like appliances and cars. Retailers have been crushed (with only a handful of exceptions).
The longer that wallets remain shut, the harder it will be for the consumer-driven U.S. economy to pull out of its funk. After 25 years of decline, the move toward greater saving is a paradigm shift.
There will be big losers and big winners as a result of this shift. (As mentioned, Zach and I cover both in our “Consumer Shockwave” discussion.)
The question posed here is this: If America is heading into a long-term savings uptrend, where are all those savings going to go?
Here Come the Boomers
The “baby boomers” are the post-WWII generation born between 1946 and 1964. There are an estimated 76 million to 78 million boomers in total – and the first of them are hitting retirement age even as you read this.
78 million is a pretty big number. It’s hard to get your head around it. I first heard this analogy a few years back and it stuck with me:
Imagine a wooden footbridge crossing a wide river. The name of the river is “retirement.” The Americans crossing over the bridge are all baby boomers. The bridge is packed from handrail to handrail. On the near side of the river, the boomers spill out at a steady pace. On the far side is a bottleneck – a mind-blowing mass of people headed towards the narrow mouth of the bridge. They cover all the land surrounding the bridge for half a mile in either direction. Over a slight hill, down into the valley and beyond, it’s just a teeming sea of people – 78 million strong – as far as the eye can see. It will be nearly twenty years before the last boomer straggles across.
A portion of boomers simply won’t retire at all – but working into one’s 80s and beyond is not an appealing prospect for most people. And nearly all boomers, retired or not, will need to add to their savings cushion as a buffer against rising medical costs.
And thus, in a very literal sense, the boomers will soon have to save like they’ve never saved before. But what kind of options do they have?
Pick Your Poison
Savers can lay out their options in five broad categories: stocks, bonds, commodities, cash and real estate.
The categories are fairly self-explanatory. Cash includes foreign currency as well as U.S. dollars. (For our many non-U.S. readers, the dollar counts as foreign currency.) Commodities would include precious metals like gold and silver. There are other options, of course – like investing in collectibles or putting capital into a business – but these are the basic five.
All five options carry risk. We’ve seen that with real estate. Remember the old expression “safe as houses”? Looks like we’ll have to retire that one into the 20th century anachronism file. (“Safe as milk” is another one, thanks to recent events in China.)
So now your home is no longer the “best investment you could ever make” – a foolish bit of establishment wisdom that was allowed to run wild – and probably will not be for a long, long time.
Once home prices finally bottom out, they could flat-line for years as the supply glut is worked off... or else rise at an anemic rate barely in keeping with the pace of inflation.
We might see boomers throw a little extra elbow grease into paying off their homes and reducing overall debt loads – but that doesn’t exactly count as saving. The trouble with feeding money into a mortgage is that you won’t see that money again for years (unless you take out a new loan or sell the home at a price you can live with).
Cash Could Crash
Going with cash – i.e. money in a mattress – is another dubious option.
The dollar and the yen have rocketed higher thanks to the great unwinding of 2008 as global equity positions are reversed... but how long can that strength really last? Do savers really want to put their faith in fiat currency as the Fed’s stimulus efforts run deep into the trillions?
Consider this eye-opening bit of research from voltagecreative.com.
As you can see, the 2008-bailout tab thus far is more than all the above items combined. On an inflation-adjusted basis, we have spent as much treasure fighting the credit crisis as we did fighting World War I.
And the costs are still mounting – not just in the States but around the globe. All in all, that makes it a pretty lousy time to have a big slug of your net worth in paper currency.
Never Enough Gold
So what about gold? Could all the boomers just say to hell with paper assets of any kind, let’s buy gold instead?
Unfortunately there isn’t enough physical gold in existence to make that work.
At current market prices, there is something like $4 trillion worth of gold in the world. That’s less than the bailout tab thus far... most of that gold is not for sale anyway... and the amount of new gold mined each year is minuscule. So if boomers tried to really pile into gold, we would see the dollars-per-ounce price zoom past the Dow.
Heck, we may eventually see that one day anyway – $10,000 per ounce anyone? – but the point is, gold and most other hard asset markets are just too small to handle the flood of savings on their own. As boomers get serious about shoring up their futures, the flows will just get too big.
This is good news for commodities overall, of course. Hard assets will make a roaring comeback when we realize the full extent of what 2008 has wrought – a deluge of funny money stimulus, plus finance cutbacks morphed into major supply cutbacks for every commodity of importance.
But given all that, savers will still need other places to go besides hard assets. The plumbing of the commodities markets can only handle so much water pressure.
Bonds No Good
So how about U.S. treasury bonds then, long one of the safest, deepest, most liquid markets in the world? Will the boomers all just pile into bonds and content themselves with yields below the true cost of inflation?
Only if they’re foolish. Treasury bonds are literally the worst deal ever right now. The yield on 10-year U.S. treasuries has fallen below 3%, a record low, as the Fed openly manipulates the bond markets.
Remember that a bond’s yield is an inverse function of its price. Savers who put their money into government bonds now are going long at record high prices. By any rational assessment, they are loading up on bonds at a screaming top.
This course of action could only make sense for two reasons:
- You think we are headed for economic armageddon, Dr. Peter Venkman style – “Human sacrifice, dogs and cats living together, mass hysteria!” – and that the nosebleed price of treasuries will climb even higher (sending yields yet lower as they asymptote above zero).
- You intend to hold your treasuries to maturity, and actually believe that 3% a year ballpark is a good deal. (Which in turn would imply that the stock market is toast for the next decade or so, and furthermore that real-world inflation will stay well below 3% until your bonds mature. Good luck with that.)
Where Does that Leave Us?
Sherlock Holmes pointed out that when you eliminate all competing options, it’s the remaining option you have to go with – regardless of how improbable it may seem.
We’ve seen that the long cycle of consumer savings decline is over, and a new cycle of saving is set to begin. We’ve furthermore seen that 78 million baby boomers are preparing to make their way across the retirement bridge – and the vast majority have a huge savings job ahead of them.
Last but not least, we’ve seen that out of the five options available – stocks, bonds, commodities, cash and real estate – four of them are either deeply unattractive (cash, bonds, real estate) or unfeasible as a full solution (commodities markets too small to handle the flows).
Believe it or not, that leaves equities as the only real long-term option left. The Fed and Treasury know this too.
To be continued...