Michael L. Boyer's  Instablog

Michael L. Boyer
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Associate Professor, University of Alaska, Southeast. B.L.A. University of Alaska, Southeast MS Mgt Texas A&M, Commerce J.D. University of Oregon
My book:
Every Landlord's Guide to Managing Property: Best Practices, From Move-In to Move-Out
  • Counter Trends to the Gray Dawn: Or Why it May be Further Away for Stock Investors 0 comments
    Sep 1, 2011 2:36 AM

    Many of you may know of Petersons works (Gray Dawn and Running on Empty), books about troubling demographic trends.  The simple thesis is that an aging population can cause some major imbalances.

    This shows up in our underfunded entitlement programs, widespread state pension underfunding, and staggering health care costs for organizations and local and state governments. These trends seem pretty constant across developed countries, particularly those with low birth rates and an older population (Japan, Germany e.g.).

    The picture for investors is also painted in fairly bleak terms as well. For as these aging baby boomers begin to retire en masse, the fear is that they will head to the counter and cash in their chips (stocks, bonds, etfs, mutual funds, real estate, etc.) to pay for retirement.

    But the demographics in the US and other developed countries are such that there may be more sellers than buyers. The stock example seems abstract, but think about a business in your community (car dealers, stores, contractors, restaurants) and particulalry older owners. Are there enough young people you can think of waiting in the wings ready and able to buy these for market value?

    The same may be true when baby boomers seek to sell pieces of real companies--stocks. There may not be enough buyers--not just younger people but younger people with cash and the interest in the assets. Note: the unemployed twenty and thirty somethings living in their parents basement, for example, may be young but not bona fide buyers of boomer assets. So we have both an age and income imbalance.

    When there are more sellers than buyers--we usually see prices drop. But the end is not near yet (even though the first of the boomers have begin to retire and qualify for social security at an alraming rate). What is the takeaway for investors?

    Jeremy Siegel also talks about these same issues in his book The Future for Investors. One possibility is that the emerging markets (BRICs) may supply the younger investor class that will buy baby boomers' assets. Another possibility is that the immigration that many rail about can improve the balance, especially with affluent, highly educated and skilled immigrants. In addition, the US demogrpahic imbalance is not as bad as other countries (we can still seem to make babies even if the manufacturing base has eroded).

    My take right now, however, is that we have some time before the Gray Dawn causes too much weariness for stock investors. Low interests--signaled to be the regime for the near term--mean even income investors in retirement will need to seek out dividend stocks, many of which are paying more than government bonds.

    In addition, the average retiree at 65 can expect to love another 10-15-20 years or more. For that type of time horizon, stocks are one of the best hedges against inflation (claims on real asset) and will appreciate to retain the real value of portfolios and nest eggs.

    So the low interest rates lead income oriented investors logically to dividend stocks and increasingly long life expectancies lead logical investors to assets that outperform others over the long term and provide real returns over inflation: stocks again. Risk, of course, is a factor for retirees. But the risk of buying into bonds at historically low rates makes the prospect of bond funds or individual bonds at any rate beyond a short term, ripe with interest rate risks. CD's and other types of savings vehicles (including government bonds) are actually bringing negative returnes after inflation. So the risks for baby boomers may be in being out of stocks for the next few years.

    Eventually, baby boomers will sell off their assets to fund their retirements dreams andto  replace their incomes, but that may be a more gradual sell off than predicted, particularly for stocks. And the delay will bring more working age buyers of assets into the fold both in the US and from global and emerging markets, putting off the Gray Dawn for stock holders a little longer.

    (The crisis in the government entitlement programs related to this demogrpahic issue (social security and medicaid), however, need some more immediate incremental adjustments to remain viable)

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