Book Review: 'Financial Reckoning Day' by William Bonner, with Addison Wiggin 21 comments
an article to
-
Font Size:
-
Print
- TweetThis
There are several economists who predicted a housing crash and the various after-effects of the decline. Headline-grabbing economist Nouriel Roubini may be the most well-known and Paul Krugman, who writes for the New York Times, warned of a housing bubble. The followers of the Austrian School of economics predicted disaster much earlier, based on the expansionary policies of the Federal Reserve; they expected a housing bubble, whereas Roubini and Krugman spotted it. More broadly, there are several economic prophets who foresaw disaster based on a mix of Austrian economics (most of them include expansionary monetary policy in their theories), those who foresaw disaster based on the larger mega trend of demographics, and a few who used a mixture of both.
You may have read about the aging of America in a newspaper or seen a report on TV. Many of the general-interest stories are simplistic, and there were also several simplistic investment theories floating around, such as buy healthcare because all the boomers will retire or sell stocks before the boomers retire. Nonetheless, my hunch is that most Americans would say overpopulation is a greater threat than underpopulation, with issues such as peak oil, clean water and global warming coming to mind. The idea of declining population as a threat doesn’t even register.
Recently, more attention had been paid to the subject. In 2004, Philip Longman wrote The Empty Cradle: How Falling Birthrates Threaten World Prosperity and What to Do About It. His book drew headlines because he extrapolates fertility rates and predicts a fundamentalist religious revival. A documentary entitled Demographic Winter examines the problem from the angle of the decline of the family as an institution. These are excellent sources of information for those interested in a deeper understanding of what could be the most important change of the next several decades. As an investment newsletter, however, we will focus on the implications for our money.
First, some background. All demographic analysis relies on the assumptions in the life-cycle path of individuals. Young people spend and borrow to pay for housing and education. Middle-aged people pay off their debts and begin to save for retirement. Finally, retired people deplete their savings. In this model of the economy, it is the middle-aged people who are credit suppliers. They buy the assets sold by the retirees, and they loan to the younger generation.
We can see the impact of the baby boom generation as they moved through life. When the boomers were young, there was high inflation in the 1970s and 1980s; they consumed more than any previous generation. When they reached middle age in the 1990s and 2000s, interest rates fell and P/E ratios soared; they demanded more financial assets than any generation. In the 2010s and 2020s, they will sell their assets to pay for retirement.
The boomer generation’s outsized population is a problem by itself, but it’s compounded by the fact that Generation X is the smallest generation ever, measured as a percentage of the overall population. Gen Xers are now entering the position of global credit suppliers, and they are bookended by the much larger boomer generation and Generation Y. STRAT-FOR, a private intelligence firm, looked at the topic from a strictly demographic point of view and came to the following conclusions: higher interest rates and higher volatility. To wit:
First and most obvious, the cost of financing the purchase of anything—whether a group of aircraft carriers or a staple gun—will go up. Fewer people and governments will be able to afford the payments that go along with higher interest costs, leading to reduced consumption and slower growth across all sectors and economies.
Second, a smaller pool of anything—credit, in this instance—results in a smaller margin for error. Economists have a fancy bit of jargon they use to describe this: volatility. Supply crunches are rare occurrences in well- or over-supplied markets. Lower availability means not only lower growth, but that the swings between booms and busts will be far more rapid and disruptive.
In 2003’s Financial Reckoning Day: Surviving the Soft Depression of the 21st Century, William Bonner and Addison Wiggin explore several topics, but the main themes running through the book are inflation (expansion of money and credit) and demographics, centered on the baby boomers. Their conclusion isn’t a sunny one: demographically the boomer generation faces a difficult transition into retirement, with costs for the entire economy. Furthermore, unlike the life-cycle scenario presented earlier, the authors purport that the boomers never really saved, because they accumulated paper assets and used them as a basis for further borrowing. The two chapters that best develop their argument are those on Japan and demographics.
Bonner and Wiggin’s economic forecast first expounds on the demographic similarities between Japan and the United States. Japan’s baby boom peaked in 1951—America’s peaked in 1961. Japan’s stock market topped in 1989—America’s topped in 2000. Both came roughly 40 years after the peak of the baby boom, when the average age of the generation was 46. The authors note that Harry Dent, a forecaster who uses demographic analysis, says that 46 is the peak age for spending and investing, and they conclude that the year 2000 marks the top of that peak. Given that the authors do not make allowances for inflation, I have to say that this prediction did not pan out, since stocks reached new nominal highs in 2007. The book didn’t come out until 2003, when the S&P 500 Index was back over 1,000; therefore, their incorrect prediction still proved profitable to readers.
They also cover the cultural similarities of the bubble period, when the Japanese believed their nation was superior and justified insane prices for stocks and real estate. The Japanese had a word to describe themselves, shinjinrui, which meant “new people.” Never-ending prosperity was the future for the new people. Americans held similar ideas with the New Economy of the late 1990s, when some claimed the country had found a way out of the business cycle, and we can add the bubble period in housing that came later. Both nations also experienced a rapid growth in debt for corporations in Japan and consumers in the U.S. The result was the same in both countries—boom turned to bust, and the debts weighed on economic growth.
In their chapter The Hard Math of Demography, the authors take a critical look at the baby boomers and their prospects for retirement. Early on they point out the hard math of government retirement programs (income and healthcare), which are essentially Ponzi schemes. The system requires new “investors,” but the boomers did not give birth to enough of them. As in the case of Japan, there are too few young people to pay for the retirees, but on top of that, retired people spend less money than young people. If Japan’s economic malaise is the result of demographics, as the authors suggest, then a period of stagnation is in store for the U.S., as the number of new producers and consumers isn’t large enough to replace those who cut back. The U.S. is in a better position because the population is still growing, whereas Japan’s population is contracting, but the math of demographics is inescapable.
Later in the chapter, the authors pull no punches as they deliver blows to the boomers. In the previous chapter they prepared readers with analysis on the behavior of crowds. Here they paint the boomers as a short-sighted generation concerned with the pleasures of today rather than hard choices for tomorrow. They cite several examples, but the important point in their argument is that the boomers borrowed far more than was prudent and easy money from the Federal Reserve made it possible. Boomers’ earnings didn’t rise much because the mass entry of women into the workforce held down wages. The average household worked more hours to earn more money, but the heavy borrowing created the illusion of a the future, but to buy back stock to boost short-term profits.
The conclusion reached by the authors is that the aftermath of this debt boom will be a bust. For every 1 percent rise in the savings rate, according to one analysis, GDP falls 0.6 percent. From a low of zero in the 2000s, if savings went back to 10 percent, it would mean a roughly 6 percent drop in GDP. Long term, savings will lead to higher growth, but the short-term effects are obvious—in the past few months, U.S. personal savings have rebounded to 5 percent, and we’ve seen how the economy per- formed. This will lead to lower earnings for corporations and lower stock prices, which will hurt corporate pension plans. Corporations will save more for pensions, lowering profits and investments and sending stocks lower. The ride up was a self-feeding cycle; the ride down will reverse it.
Demographics will happen whether we like it or not, and there is no way to get around the reality, because populations are basically fixed in the short term. The authors dismiss immigration as a solution, because it would require doubling the annual amount, and perhaps they are right given the current mood in the country. In relation to other developed nations though, the U.S. is in the best position demographically, and population growth here will even exceed that in some developing countries. (China’s one-child policy will deliver a similar headache for that country in the not-too-distant future.) This presents a different set of problems in the short run, however.
In the past couple of years, annual births in the U.S. exceeded the peak of the baby boom for the first time. On top of that, the aging boomers of Asia and Europe who poured money into the U.S. over the past two decades will begin to draw down those assets. The demand for money to pay for these children and the growing number of retirees (and all the financial bailouts) will fall squarely on the smallest generation in U.S. history—and they will have fewer foreigners to help them out.
Bonner and Wiggin dubbed their forecasted economy a “soft depression,” but the real fireworks may be in the political arena. Poorly designed entitlement programs weren’t a problem before because even though government took a bigger slice of the pie, the pie was growing. Redistribution of wealth didn’t register when everyone had more money in their pocket. If the authors are right in their thesis, a major cultural change is on the way too, because the hit to financial assets will be permanent in the sense that it will take a long time to reverse and a cut in entitlements will follow. Savings and retirement goals will be reached the old-fashioned way—by saving a lot of money and spreading it across asset classes.
This book is available from Agora Book Publishing.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Joseph L. Sha...
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
On Apr 10 04:04 AM 367851 wrote:
> Stick your bacon and eggs up your ass America.
I think this gives a great deal of concern for the Social security ponzi scheme that will fail eventually when more take out than put in. Simply a ponzi scheme that fails like Madoff.
I'd be curious to look at a non-US demographic though... I think we all know the effect our aging population has had on us and we know where SS is headed...
In every recession the doomsters come out of the wood-works shrieking "the world in ending - the end is nigh (learn about iin my book, report etc. we accept Visa, Amex ....)"
America is not Japan - its open to immigration, innovation . We live in a globalized world. Plus you can always invest in dynamic young societies like Brazil, India etc. if you don't believe in America.
When the government start intervene with the economy, there will start to restrict immigration(protect US Citizen job, they will say) and with the budget deficit, hefty tax increase in likely in the near future and it will most likely stifle innovation. We may suffer brain drain in the coming years....
As I constantly add, Seeking Alpha needs an editor/proofreader to separate the meaningful financial wheat from this ridiculous, 'extend the trendline' fluff.
cyclingscholar
The immediate term in front of us will definitely be difficult as even illegal immigrants are finding it difficult to stay employed and, in some cases, returning home south of the border. That could actually help keep unemployment from getting too far out of hand, but it is certainly no solution. We must still go through consideralble pain before this mess stablizes.
The book makes a point about baby boomers retiring and selling their assets which is supposed to put upward pressure on borrowing costs. That may happen but I don't expect the impact to be as harsh as indicated. I am a baby boomer born near the beginning of our generation, during the 1940s, and I don't plan on putting my money under a mattress. I have already sold all stocks (as of last summer when I woke up to what was coming). I bought some short ETFs to get me back to where I was before my portfolio started deteriorating. I realize that everyone isn't whole. But we will need income and will probably buy sovereign debt for safety. That is a good thing since it will remove some of the need for the government to compete against the private sector for debt issues. We baby boomers still have a few $ Trillion left.
I am not saying that interest rates won't shoot up initially. They may need to if inflation kicks in at some point. I believe that rates will rise and I believe that many of us will jump on those rates to lock in long-term returns to live off of during retirement.
The other question that needs to be asked is when will the boomers retire? It seems that the book assumes that mass retirements are imminent. I just don't buy that. I don't plan on retiring any time soon because I own my own business and enjoy what I do. I'm probably the exception. But many boomers will not retire as soon as they had planned because of the losses they have suffered. They need to save some more and they don't have time to rely on for appreciation. Many will just have to work an extra decade or so beyond their original plans. That could put off the failure of the social security ponzi scheme for a little longer.
In the end, even though the authors rule it out, I believe that an increase in immigration will become the obvious solution. We can't afford to continue accepting the unskilled illegals forever. But we could, with proper direction from the government (doubtful), we could once again become the magnet for the best and brightest of the world. Allowing people in who are nearer the Gen X age could fill in our demographic deficiencies where we need them. We don't need people right at the moment, of course. But when the economy is back on a growth track, in say a decade or so, a controled increase in immigration could improve our prospects greatly.
On Apr 11 11:58 AM cyclingscholar wrote:
> Complete garbage which will be overwhelmed by the medical breakthroughs
> which expand lifespan. By 2050 a child will have an expected lifespan
> of 250 years at birth, and most of those 250 years will be vibrant,
> productive and youthful. Crank 10% annualized rate of return on your
> retirement portfolio into a 220 year period and see how poor we'll
> all be.
>
> As I constantly add, Seeking Alpha needs an editor/proofreader to
> separate the meaningful financial wheat from this ridiculous, 'extend
> the trendline' fluff.
>
> cyclingscholar
There are simple counter arguments to every idea presented by these two well known names in the financial business.
First, within a short period of about ten years any woman can produce five or six children without any trouble, even if she isn't married.
Second, happiness does not come from having a new car every three years, and a better house every five, not to mention having all the latest gadgets and trinkets including big screen, virtual reality TV.
Almost every philosopher, in every culture and time, has placed money at the bottom of the list of requirements for a happy life.
Money only becomes important when radical social and political injustice and huge class differences prevent children from getting a good education, adequate diet and health care and other conditions which are necessary for growing to healthy adulthood.
As for the health care crisis and the crisis produced by an aging population, each individual can have a much better chance of having good health by eating intelligently, not smoking or abusing drugs, including alcohol, by keeping his weight under strict control and by getting adequate exercise.
It is impossible to avoid breathing city air or to completely avoid food containing carcinogens and, even if we could, some of us will get sick anyway or have life crippling injuries.
Health insurance would be affordable for a healthy society, and taking care of the elderly would be much easier if most of us followed the simple rules of healthy living.
These ideas, and many others, are common knowledge but ignored by most. I take no credit for bringing them to your attention. In fact, taking credit would be dishonest.
Listen to ideas, including your own, not famous authors.
So inflation is coming, geez, who'd a thunk it? The USA is following Japan, HUH? Japan is a CLOSED SOCIETY, that's the opposite of our troubles here in the States.
I agree with the posters who wonder why Seeking Alpha doesn't separate the wheat from the chafe, these two bozos can't be taken seriously unless you live in a 3rd world country or you're a muslim.
'Nuff said.
Why would anyone "Call For Censorship"? I would rather have opposing and even unpopular views presented so that I can judge their validity and usefulness for Myself. Spoon Fed Data Streams Result In Misconstruing Reality And Possible Manipulation. It is the responsibility of the Reader/Listener to determine truth and application.
Reality Will Be Reality, Whether Believed In Or Not.
The Earth Was Flat And Was The Center Of The Universe At One Point In History !!! Obviously this was not the "Reality" case; but it was "Common Knowledge".
Those Who Only Look At Data Which Supports Their Own Paradigm Will Be Deluded.
Don Dion, I appreciate another vantage of evaluation. Population is where the economy is derived from.
Boomers working longer ? At what Jobs ? Most of my friends in their mid-50"s have been laid off past 2-3 years . YOU have your own business , most boomers do NOT . I hope your business is not consumer , retail , oriented . If it is , AS Reg Middleton says " you're in DEEP do-do . The younger folks , gen X 'ers will not have the income potential the boomers had for many years . Even the IMF has recently stated " worldwide wages will meet parity , within a decade . This does not bode well for Xer's income , living standards , US + state tax revenues OR boomers retirements .