Boomers in Trouble: The Unheralded Economic Mega-Trend, Part 1

Thus far, analysis the financial collapse has been framed almost entirely in terms of money. All the research I’ve seen has delved into lending standards, securitization, inflation, interest rates, housing and the like.

Yet underneath this veneer lies one larger, mega-trend that has driven all of these themes to a greater or lesser degree. It created one of the largest stock bull markets we’ve ever seen from 1982-2001. It helped drive the Bubbles in Tech stocks AND Housing. And now it will guide the coming collapse in stocks and consumer spending.

That trend is AGE: specifically the Boomer generation and its retirement.

For the sake of simplicity, I will define a “Boomer” as someone born in the post war boom years from 1946-64. Using this data, today’s Boomers are between 45 and 63 years old. All told there are 76 million Americans in this age category. As of late 2008, Boomers:

• Comprised 38% of the US population
• Controlled $13 trillion (50%+) in US investable assets
• Controlled 50% of all discretionary income
• Purchased 43% of all new cars
• Accounted for 79% of all leisure travel spending
• Ate out four to five times a week
• Outspent younger generations by 2 to 1

You can see Boomers’ imprints on every major investment trend of the last 30 years whether it’s the rise in consumer spending, the Tech Boom, the Housing Boom, etc. These folks ARE the investing crowd or tide as far as money goes.

Please understand, I am not BLAMING the Boomers for ANY of these developments. I am merely pointing out that these folks were the primary participants who drove ALL of these trends due to their ever-increasing economic clout. Between 1980 and 2007, Boomers were “the money” behind virtually every economic development in the US.

The Boomers first came of age in the ‘80s (they were 16-34 years old at the start of the decade). Boomers were the first generation to fully adopt credit cards: between 1980 and 1990, credit card spending increased more than five-fold while average household credit card balances quadrupled. They were also the first generation to see stocks as THE means of securing ones retirement: stock-based 401(k)s were introduced in 1983.

By the time the ‘90s rolled around, Boomers had completely entered the workforce (ages 26-44). Thanks to easy credit and cheap goods from China (formal trade with the US opened on 1971), the Boomers operated under the illusion they were getting richer almost every year, when in reality they were spending their and their parents’ savings.

Having seen stocks rise almost continuously from 1982-1990, Boomers were only too happy to take over own investment portfolios with the introduction of low cost online brokerage accounts. In 1950, 10% of US adults owned a stock. By the end of the ‘90s more than four in ten American adults were investing in the market. This massive influx of money helped, in part, to create the Tech Bubble.

By the end of the 20th century, Boomers were ages 35-53. They had truly come into their own as THE major wealth demographic, making most of the income and spending most of the money in the US. Having accrued debt for 30+ years without trouble and seen housing prices rise almost continuously during their lifetimes, they began speculating in homes and other higher value assets. This trend was fueled in large by Wall Street’s securitization and the dramatic drop in lending standards in the US.

Which brings us to last year.

In 2008, the Boomer generation was already in the process of or at least beginning to consider retiring. In the decade from 1992-2003, more than 70% of Boomers had seen their wealth increase by more than half. An additional 20% of them saw their wealth increase better than 25%. And they were set to inherit some $7.2 trillion in wealth from their parents over the coming decades.

Then the Financial Crisis hit and the Boomers got crushed.

Last year’s collapse in housing and stocks wiped out $11 trillion in household net worth in the US. That’s roughly 18% of total US household wealth at that time. Put another way, the Boomers just lost nearly 1/5th of their wealth in a single year (the same goes for they money they were set to inherit from their parents which was largely tied up in stocks and real estate).

Boomer wealth continues to plunge: Commentators celebrated the fact that home prices ONLY fell another 0.6% in June, but none of them mentioned that this represents another $100 billion in US wealth gone.

Bottom line: The 20+ year expansion in Boomer came to a screeching halt last year. We’ve now entered what may in fact be the greatest period of wealth destruction in American history. The effects this will have on Boomer spending, investing, and the like will completely change the investing and economic landscape for the US REGARDLESS of what the Fed, Obama, or any other economic/ political authority attempts.

Continue to Part 2 >>

Comments

[Dean M:]

If that's true then all this armageddon talk of widespread starvation, chronic unemployment and roving gangs is way off the mark since Japan has seen none of that.


On Jul 13 06:03 PM dybydx wrote:

> well just look at what happened to japan. their real-estate and stock
> bubble poped in late 80s and has not recovered since.
>
> coincidently, their population is now decreasing and more dramatically,
> their working population is shrinking rapidly.
>
> if u want to see where the US is headed for the next 20 years, look
> at japan.

Jul 13 11:16 PM

[Cliff Wachtel:]

great article, need to see more on the profound effects of demographics on the markets (as well as everything else) . Do you have any good sources to recommend? If so, please email them to me at [e-mail] thanks, cliff

Jul 14 01:18 AM

[expat in China:]

Dean M!

Mr Summers is not talking Armageddon just the simple fact that a very large part of the consumer is dead in the water and will not be returning any time soon. The wealth transfer away from the middle class is with out a doubt taking place for most of the Boomers.

Japan area nation of Japanese and would kill them elves before embarrassing there families or their companies so don't try to even compare to the boiling pot of ethnic Americans. If you travel through Chicago, LA or New York you will see very clearly the segregation and ethnic tension drawn between suburbs that can very easily erupt into street militias struggling to survive.

Jul 14 02:07 AM

[expat in China:]

where is my spelning and grama checkor

LOL

Jul 14 02:49 AM

[perceptions...:]

There are several monsters hidden in the closet, Peak Oil & an aging population.

The tendency is, if we can not see them, then they are not there or they will magically disappear.

There is a suggestion is that the GFC hit and the Boomers got crushed.

However, the truth is that around 2005, two unique events started, they caused the GFC and they crushed the global economy.

Peak Oil became a fact & the leading edge of the Baby Boomers started a 20 year transition, from their Peak Earning & Spending years, to thrifty retirees, to leaving us forever.

The combination of both of these unique factors, will direct the global economic course for the next 2 decades, at least!

Jul 14 08:36 AM

[Dean M:]

I know he didn't advocate armageddon, I just see alot of that crap on SA. No question that the idea of retirement being like a luxury vacation thanks to outsize investment will prove to be a fallacy but it was a flawed viewpoint to begin with, not something that should have been expected.


On Jul 14 02:07 AM expat in China wrote:

> Dean M!
>
> Mr Summers is not talking Armageddon just the simple fact that a
> very large part of the consumer is dead in the water and will not
> be returning any time soon. The wealth transfer away from the middle
> class is with out a doubt taking place for most of the Boomers.<br/>
>
> Japan area nation of Japanese and would kill them elves before embarrassing
> there families or their companies so don't try to even compare to
> the boiling pot of ethnic Americans. If you travel through Chicago,
> LA or New York you will see very clearly the segregation and ethnic
> tension drawn between suburbs that can very easily erupt into street
> militias struggling to survive.

Jul 14 08:57 AM

[SivBum:]

Now I have been reminded of my loss in net worth. Waa! Wha! Wa! My mother was right to invest in T-bills back in the 80s.

Jul 14 10:07 AM

[newamericanow:]

Since this is a consumer driven economy needing new debt to be incurred over the previous year we are all screwed and this was very predictable because it was unsustainable. Comparing japan to the US is comparing apples and rice. Japan does not have a world currency and still has a major manufacturing base, just look who's name appears on all you electronic equipment in your home. The economic collapse is imminent my friends so get your head out of the sand and turn of American Idol because this is pretty serious stuff . Our whole economy is about to implode because of the shortsight of our American political system and yes our apathetic citizenry. We keep borrowing and the credit has dryed up. We can't even pay the interest let alone the principal. The boomers will speed this process up because of entitlement programs created by them and their parents generation will not be able to be fullfilled. I feel it may be as soon as this fall...September-October. States can no longer support themselves because Sales and Real Estate taxes are way down, but states have already spent the money prematurely, counting on revenue that did not appear. IOU's they say in hopes that things will turn around by October. Not a chance folks. See my Blog for info at www.newamerica-now.blo... and my youtube channel at www.youtube.com/user/n... for real advice. God Bless us we are going to need it.

Jul 14 11:02 AM

[Dan in mpls:]

Sorry, I cant resist this one. The boomers who came of age in the 60s and found love and peace in a pipe or pill werent doing much investing <G>. I guess he means financialy speaking of age and that did come late for many. While I dont think hes tying this whole thing too tightly to todays financial mess, it is true that the general trend will greatly muddy the predictive waters for a recovery. His next article might cover the added wrinkle that the following generation never much learned to work and the current one has no clue what it means whatsoever - damn, more generalizations!

Jul 14 11:44 AM

[mkttrdr:]

A new America is indeed needed.
Creating more debt than the house is worth created this mess-and DC is doing just that! How can they or anyone do this-ta da-print money at will-back by faith-no assets but its taxed citizens-oh, that will solve it! Why can't the rest of the under educated or informed figure this out?
We have problems -yes and a bigger one is coming.

Maybe Economics and balacing a checkbook should be required grade school corse work. Is anyone in DC or are they out to lunch?

When 50% of your countries wealth and almost 40% of your taxed citizens are saving for retirement and selling assets, not buying, what do you think can happen? Japan went down this road.
That's why you'll hear "God Bless America" more and more.
We need more than a blessing and a prayer-We need the truth!

Jul 14 12:03 PM

[mkttrdr:]

Did ya read the errors(sic)-? Sorry about that!

Jul 14 12:05 PM

[snagglesnarf:]

Graham, I think you are being too kind. The bulk of this crisis can be attributed mostly to the values of the boomer generation. The problem of overconsumption and living beyond one's means started in the 80's and continures to this day. My generation will be the first in our history that will leave the country in worse condition than we inherited it.

Jul 14 12:35 PM

[TBill:]

Household wealth drops 11 trillion in the last year... kinda puts it in perspective, doesn't it? Government prints and pumps a trillion or two in and it doesn't work... just like FDR's spending didn't work, just like Japan's spending didn't work. I don't know why we bother. Looks more like an excuse to reward friends and fund pet projects to me.

Jul 14 01:12 PM

[T.Stamps:]

Very good article.

Jul 14 01:28 PM

[joes:]

There were some very good comments here, a couple that stood out;

1. The emphasis on the Boomer generation is a naive perspective that had marketing value and little more, a young boomer has more in common with an older X,er than an older boomer.

2. If you look at the progress in quality of life the boomers did very well, although the ultimate cost of the credit issue is poorly understood.

3. Accumulation of wealth at the individual and small group level has diminishing returns, this is a fact that has been shown by many studies and should be integrated into future educational efforts.

4. The US still is the largest manufacturing country as measure by production dollars in the world.


On Jul 14 11:02 AM newamericanow wrote:

> Since this is a consumer driven economy needing new debt to be incurred
> over the previous year we are all screwed and this was very predictable
> because it was unsustainable. Comparing japan to the US is comparing
> apples and rice. Japan does not have a world currency and still has
> a major manufacturing base, just look who's name appears on all you
> electronic equipment in your home. The economic collapse is imminent
> my friends so get your head out of the sand and turn of American
> Idol because this is pretty serious stuff . Our whole economy is
> about to implode because of the shortsight of our American political
> system and yes our apathetic citizenry. We keep borrowing and the
> credit has dryed up. We can't even pay the interest let alone the
> principal. The boomers will speed this process up because of entitlement
> programs created by them and their parents generation will not be
> able to be fullfilled. I feel it may be as soon as this fall...September-October.
> States can no longer support themselves because Sales and Real Estate
> taxes are way down, but states have already spent the money prematurely,
> counting on revenue that did not appear. IOU's they say in hopes
> that things will turn around by October. Not a chance folks. See
> my Blog for info at www.newamerica-now.blo... and my
> youtube channel at www.youtube.com/user/n... for
> real advice. God Bless us we are going to need it.

Jul 14 02:13 PM

[kebu77:]

The currently high savings rate is almost certainly attributable to boomers in their peak earnings years. Many boomers will extend their working years to make up for wealth losses. The effect of these two factors has yet to be quantified.

Jul 14 03:13 PM

[Old Trader:]

Dean M.,

You're certainly correct about saying Japan hasn't seen anything like that, but you're not taking into account the tremendous cultural differences. For example, the Japanese place a high value on consensus and conformity; we're almost exactly the opposite, In Japan, the elderly are respected/venerated; here, if they're lucky, they're merely ignored. I could go on into things like gun ownership, etc., but I think you get my gist.


On Jul 13 11:16 PM Dean M wrote:

> If that's true then all this armageddon talk of widespread starvation,
> chronic unemployment and roving gangs is way off the mark since Japan
> has seen none of that.

Jul 14 05:43 PM

[Yohei:]

My experience with Boomers is that they live in an utter dream world. Boomers as a group are utterly detached from reality. They are not insane, however, but rather are not sane.

There are individual exceptions. Unfortunately they are so few that when one such encounters another it can be a novel and very enjoyable experience. Most Boomers who don't live in their inner fantasy world are unpleasant and cynical folks.

Speaking with authority here. I was born in 1946. Been there, done that, as they say.

Jul 15 04:24 PM

[Hillsfar:]

As much as I agree about what's happening with the Boomers, I think they do have some redeeming qualities.

Before we blame everything coming down the pipeline on the Boomers, however I do think we should look also at the current generation coming of age.

It's not just the bleak economic and social situation we're leaving to future Americans. "Gen Y" is far less talented as a group (perhaps due to lax parenting standards and lower economic prosperity). Only about 70% of them are graduating high school. For Black and Latino minorities, the high school graduation rate is more like 50%. In addition, the overall graduation standards are much lower than they were in the past, and many of them lack the kinds of work ethic that helped the Greatest Generation and even Boomers build this country to greatness.

Today's youth are less qualified for the shrinking number of good-paying jobs that remain, while low-skill jobs in manufacturing and farming are drying up even faster.

Jul 16 05:23 PM

[1mania4u:]

Japan's land mass is slightly smaller than California, with a very homogenous population, which is an impediment to a diverse economy.


On Jul 13 07:48 PM jstratt wrote:

> I think you make some excellent points for investors. Stocks future
> value may be restrained by demographics
>
> Take a look at Japan which had their crisis in the 90s and they are
> demographically older than the US. The S&amp;P has outperformed the
> Nikkei by 500% using the yahoo comparison from the 1980s. It is possible
> we we experience the same lack of growth moving forward.

Aug 10 11:54 AM