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Fed Study On Demographics And Markets Ignores Boomers' Lack Of Savings

|Includes: SPDR S&P 500 Trust ETF (SPY)

The Federal Reserve's economists can be counted on to provide food for thought. The downside is that they sometimes only cover half the story. The San Francisco Fed recently published an Economic Letter comparing age demographics to stock market returns. The theory is sound; after all, prices for stocks are driven as much by demand for investment and the supply of shares available as any other marketable good. One major problem with this study is that Boomers may not have enough invested in the stock market to make withdrawals on a scale that will depress market returns.

This study assumes that Boomers' retirement assets are significant enough to move the market upon conversion to cash. Evidence of Boomers' savings do not support this assumption. More Americans than ever before have negligible to zero retirement savings. One quarter of all Baby Boomers are totally without any retirement resources at all.

Perhaps the other three-quarters of the Baby Boom generation will be the ones depressing the stock market with their withdrawals. All it would take is for them to figure out how much to withdraw. Most Baby boomers don't even know how to plan for their needs in retirement. There is no way they can estimate how much of their portfolios they'll have to liquidate.

The Fed economists may be correct, but we are equally likely to stumble into a chaotic period where stock market prices remain the plaything of central bank monetary experiments. Retirement assets that are out of individual investors' control - like 401(k) plans and public employee pension plans - may be subject to nationalization and confiscation if a dollar collapse forces the U.S. government to repay its foreign creditors in desperation. If that happens, stock prices may not be hurt all that much if equities are surrendered to the Chinese central bank as payment in kind for U.S. Treasuries. A collapsing dollar would prompt the Chinese to demand progressively more equities in exchange for Treasuries sinking in value as a dollar crisis progresses. It seems that such demand would sustain U.S. equity prices in the face of Boomer withdrawals, negating the Fed researchers' conclusions.

Follow this think-piece to its conclusion. China will end up owning the U.S. stock market and Boomers who haven't saved will "withdraw" devalued U.S. Treasuries from what remains of their former employers' sponsored plans. See, it won't be so bad after all.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am long a Bank of China CD that matures on 9/29/11. I am long FXI with covered calls.