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The One Mega –Trend NO ONE is Talking About Pt 2

Yesterday we discussed the Boomer generation and how they’ve driven every economic/ financial development of the last 30+ years.

Today, we’re going to analyze how the Financial Crisis has changed Boomer sentiment, spending behavior, and investment strategies. Ben Bernanke, Barack Obama, and the rest of the government can implement whatever policies they like, but if the Boomers aren’t buying it… it ain’t gonna work.

And right now, the Boomers are FED UP.

Let’s consider where Boomers sat before the financial crisis occurred. In early 2008, Boomers:

  • 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

In simple terms, Boomers were THE money flow for the US.  In light of this, for the US economy to get back on track any time soon (whether it’s through Stimulus, job growth, etc), Boomers need to participate in a big way.

The only problem is that they won’t.

During the recession in the early ‘80s, Boomers were just entering the work force (ages 16-34). The market demographic was technically still in its infancy and growing in economic clout.

In the recession in the early ‘90s, Boomers were ages 26-44. Now controlling most of the wealth in the US they could take a hit and come right back buying more stuff, using their credit cards, and investing in stocks and other investments.

Moreover, in the brief recession in the early ‘00s, Boomers were ages 36-54. The younger Boomers were just coming into their own, looking to buy homes, advance their careers, etc.

Which brings us to today… on the verge of 2010… when Boomers will be ages 46-64 and focusing on one thing: RETIREMENT.

Having just lost 18% of their net worth, potentially lost their jobs, and with record amounts of debt (one in five of Boomers owe more than $50,000 in non-mortgage debt), Boomers are no longer looking for growth or gains, they’re looking for security. Dreams of retirement are no longer soon to be realized (if they will be realized at all). And several key myths have been broken:

Myth #1: You can’t lose money with real estate

Myth #2: Stocks ALWAYS offer the best gains in terms of risk/reward.

Myth #3: Social security and medicare will work

Indeed, if one were to describe the Boomer market demographic in one word, it’d be “disillusioned.” And you can see this disillusionment playing out in the financial markets.

First and foremost, many commentators make a big deal about the S&P 500 clearing 950… well that simply brings stocks back to where they were in July 1997. Boomers (who then were largely in their 40s then) have essentially seen NO GROWTH in their 401(k)s in 12 years. That’s simply astounding when you consider that 1997-2007 saw two of the largest investment bubbles in the history of mankind.

Boomers aren’t too happy about all of this and have begun looking for new sources of investment advice. According to the Financial Times, the number of inquiries on changing asset managers rose 40% during the first five months of 2009. Indeed, Charles Schwab reports 69% of the firm’s new clients said they jumped ship from full-service brokerage firms to independent advisor shops because they had lost trust in their previous firm.

Boomers are also giving up hopes for retirement and instead are taking on more work. The (American Association of Retirement Professionals) reports that 24% of Boomers have postponed retirement. David Rosenberg of Gluskin Sheff  adds that the 55+ age demographic is the only segment of the US population that is gaining jobs.

Boomers are also spending a lot less than they used to. The afore-mentioned AARP survey shows that 56% of Boomers are postponing a major purchase. Unit sales of sailboats is down a third in the first five months of 2009. Year over year, auto-sales for May 2009 were down in double digits ranging from 21% (Ford) to 38% (Toyota); remember Boomers accounted for 43% of purchases of new cars in 2007.

This slow down in spending pertains to just about any other high-end part of the retail market. Wine sales for bottles priced above $25 are down 12% year over year. Swiss watches are down 24%, The list goes on and on.

Folks, we are experiencing seismic shifts in consumer spending patterns. The US consumer (the Boomer) is NOT coming back. Boomers are trying to simply get by with less, working longer than they’d hoped, spending less, and saving more. These patterns are here to stay (remember Boomers outspent younger generations by 2-to-1 during the last decade) until someone implements changes that create sustainable job growth (an ultimately wealth) in the US.

I’ll detail how these trends will impact the stock market going forward tomorrow. Until then...

Good Investing!

 

Graham Summers