Demography is Destiny

I generally blog about matters of the heart. Every now and then, though, I veer off into subjects that interest me on other levels. As you know, investing is but one. So, for those of you who may be interested, here's my investment thesis (with a bit of prosyletizing tossed in for good measure):

I began investing about 30 years ago. I was a complete knucklehead, then (as opposed to the semi-knucklehead I am today). The best thing about investing (besides the money part), is that it makes you think about a host of factors: technology, consumer trends, corporate behavior, trade, politics, micro and macro-economics (the list of relevant considerations is long, indeed). Investing sharpens one’s analytical skills...and teaches us humbling lessons. In order to succeed, I voraciously read scores of books related to investing.

In 2000, I picked up Harry Dent’s book, “The Roaring 2000’s.” It had a profound impact on me. In essence, Dent correlates population dynamics to stock market performance. It was an eye-opener.

I’m a Boomer...Hear Me Roar!

The unprecedented Baby Boom generation (a super-sized population bubble), has been a mighty disruptive force. There are 80 million of us, and we’ve impacted American society from Day One. Dent correlates the life stages of the Boomers to stock market performance and the correlation is quite amazing. Remember the stagnant Market from the mid-60’s to the mid-80’s? We boomers were still growing up (sucking up our parents’ money)...not investing. Sports/muscle car and motorcycle sales hit all-time highs in the late 60’s/early 70’s (yep, I drove/rode some of those). Remember the skyrocketing inflation of the 70’s? Dent offers the most cogent explanation I’ve ever read: Boomers were starting their adult lives, then. Think about it, you finish school and strike out on your own with little money. You need a home, furnishings, appliances, car, etc., but your entry-level salary is laughably low. So you borrow and borrow...and so we did. The government had no choice but to print money to serve these 80-million shiny new, ravenous consumers. So it did, and inflation roared ahead. The Market went nowhere. Why should it? You could get 12+% in a money market fund...and the Boomers were still net borrowers, not savers or investors.

We settled in, got married, had kids, advanced in our careers (remember the rise of the Yuppies?). We began to save and invest, slowly at first. In the 1980’s, we traded in our sports/muscle cars, and the minivan came into vogue. Remember all those yellow diamond “Baby/Child On Board” placards in the rear windows of minivans? Yep, that was us hauling around our young-un’s. After 1987, the market took off on an extended 13-year bull run, gathering steam every step of the way. You see, we Boomers began socking money away in IRA’s and 401(k)’s. Money flowed into the Market by the billions. Ah, NASDAQ 5000! Oh, I was rich, RICH, I tell you! Well, we kinda got a bit ahead of ourselves, no? The Market took a BIG hit, and came crashing back to earth. A pause to refresh, so to speak. The money didn’t stop flowing though; rather, it went into bigger, more expensive housing and vacation homes. It flowed into the European and emerging markets. We then kinda got a bit ahead of ourselves in the housing market, no? Well, as all markets eventually must, housing began (and continues) to correct itself. Minivans? Passé. Hail the Lexus, Acura, Infiniti and the mighty SUV...cuz...well, we Boomers got a whole lot more comfortable and...”fluffier.” Our money’s flowing back into the stock market, now...and it will continue to do so. Why? Even though the first Boomer applied for social security last week, there are a whole mess of us still saving and investing. I believe this trend will accelerate dramatically over, oh, say, the next five years. Why? Because I look at my friends (we’re generally leading-edge Boomers with plenty more millions of us on our heels), and I see them plowing money into investments as their children leave school and begin their own lives. Most haven’t saved nearly enough to retire, and they’ve gotta make up for lost time. All the money that went to raise their children and provide for their children’s education will now be spent on themselves, and the rest invested. Just watch. The Market’s been on an upward trajectory for 3 years now. As all bull markets do, it will accelerate until that final glorious mad rush to the heavens. In a few years, I’ll start watching for signs of massive day-trading, again, cuz bull markets make geniuses of us all, dontcha know! That’ll be the signal that the party’s about to end.

Momma said “It’s all fun and games until someone gets hurt.”

About the time that a whole bunch of us exit the workplace, stop pouring money into the Market, and begin drawing down our assets...say, 5 to 10 years from now...all hell will break loose. It’ll be ugly. Why you ask? Because we’ve pretty much laid the foundation for disaster. Social Security will veer sharply into the red (where was that “lockbox” when we needed it?). We’ve already run up a $9-10 Trillion National Debt (and toss in a trillion or two more I.O.U.’s for the costs of war). Medicare/Medicaid? We’re talkin’ unfunded liabilities of $50 - 70 Trillion! Where will we find the money to keep our promises to our citizenry? A LOT of people will be hurt, either through reduced benefits, medical neglect/expense, higher taxes, and/or inflation (if we simply print the money to keep going). It won’t be pretty for consumer-driven businesses, either. We Boomers are in our peak earning years now and spending freely. But consumer spending will slow as Boomers cut back. Case in point: I rarely shop anymore; I’ve pretty much got all I need. Even more significant, most Boomers haven’t saved nearly enough for retirement. They’ll cut back on spending out of necessity. Housing prices could very well decline - the opposite of the rapid rise in housing prices in the 70’s when Boomers started buying homes. Soon enough, many “empty-nesters” will begin down-sizing. I can see a rise in resort destination housing, but housing prices, overall, may well slump. Why? Because Gen X-er’s represent a population “trough.” That’s right, there are FAR fewer of them than there are us (and Gen Y-er’s won’t yet have enough buying power...they’ll just be starting their adult lives...borrowing, not investing). Who’ll buy the homes the Boomer’s put up for sale? Good question. The supply will outstrip demand. There’ll be a housing glut. Not good.

Let’s go back to healthcare for a moment. Healthcare costs have been rising alarmingly already, but we ain’t seen nothin’ yet. You say we’ve got the best system in the world? Maybe we do, but we won’t be able to afford it much longer. Companies are already straining to contain spiraling costs. Many companies (particularly small businesses) no longer provide employee health benefits. Think you’ll be covered under a defined-benefit retirement plan that promised health insurance coverage? Think again. Several corporations have already reneged on those promises. As costs increase significantly, expect more to do the same. We’ve already got 40+ million without insurance and even more who are under-insured. And we’ve been fortunate heretofore! The pool of insureds consists mostly of Boomers and their offspring who’ve been relatively healthy. But we’ve grown old. I’ll use myself as an example. I had little need for doctors in my 20’s, 30’s and 40’s. Oh sure, I’d get an annual physical, but that was about it. I was thin, a marathon runner, no health problems to speak of. Now that I’m in my 50’s, I’ve discovered that the chronic pain in my hip is osteo-arthritis. Yep, I’ll be needing a new hip. I, then, tore my meniscus. Had it repaired, discovered I’ve no cartilage in my knee joint, either. Yep. I’ve got a knee replacement beckoning. I’m developing cataracts in both eyes (too much fun in the sun). Yep, more surgery. I don’t know what my body holds in store for me, but I bet I won’t be smiling, and it’s a sure thing that it’ll be expensive. And I’ve been healthy my whole life, assiduously paying my premiums, and extracting little from the system. All of that is about to change...dramatically. It’ll be a friggin’ mess. Think your premiums are high now? Just wait until all the uninsured, underinsured and insured Boomers flood the hospitals. Premiums will skyrocket. No one will be able to afford health insurance under our current system. The cracks in the system have already appeared.

And the Market? Sigh. I predict an extended bear market. There aren’t enough Gen X-er’s to replace the money the Boomers have been/will be pouring in. How bad can it get? Remember Japan? Japan went through the generational life-stages ahead of us. They didn’t have a baby boom like we did (having lost so many men/women in the War), but they were reproducing like crazy before the War. Consequently, their population demographics skewed older than ours. Remember the Tokyo stock market in the 80’s? It roared. We watched in awe as the Nikkei soared to the sky. We called Japan the “Asian Tiger.” Yep, that’s right...the Japanese were socking away money hand over fist, saving for their retirement. Then, in 1990, it happened, the collapse...followed by a 13-year bear market during which all stocks fell in a steep decline. They’re only coming out of it now (as their children matured and began investing earnestly again).

If you’re a Gen X-er, well, what can I say except “I’m sorry?” We Boomers are gonna really futz up your life. You’re not gonna have the extended bull market we fueled. You’re not gonna see the value of your house increase dramatically. You may even lose your job as domestic consumer spending patterns change. We Boomers had EVERY advantage. (Note to my “Bootstrappin’” brethren: personal responsibility is fine, but it also REALLY helps to be in the right place at the right time).

Well, there you have it, my investment thesis. If you have money, invest it NOW! You may not get another chance like this for a mighty long time. I’ve also been shifting my portfolio towards multi-nationals and overseas holdings and I’ll continue to do that (sheesh, now I’ve got to learn about foreign corporations and economies!). I’ll grow increasingly watchful and concerned as the Boomers continue to retire (10 years away for me).

But what about the health of our Nation? As I’ve said, we’ve pretty much done the exact opposite of what we should have been doing. We’ve known the Day of Reckoning is coming. Wise individuals on both sides of the political aisle have raised the dual issues of Social Security and Medicare/Medicaid liabilities for decades. Did we build up a surplus? No. To the contrary, we ran up a HUGE National Debt. Did we address our systemic national health care issues? No, not at all (the insurance lobby is powerful indeed!). Have we increased our domestic manufacturing base to produce goods for sale to other economies in anticipation of our own soon-to-decrease consumer spending? No. Quite the opposite. Our manufacturing base has shrunk considerably. Granted, our multi-national corporations have increased their overseas manufacturing capacity greatly...better to serve their growing foreign customer base. Good for the corporations...not so much for the American worker. Meanwhile, we’re running up huge trade deficits. China already has over a trillion U.S. dollars in its pocket. Just wait until our market goes on an extended bear decline. They’ll probably want to buy up more than a few of our companies on the cheap (they’ve already been shopping).

We don’t have much time to implement changes that would soften the blow. No matter what we do, it’ll be unpalatable to most, painful for most, but it’ll be necessary. Demography is destiny. We can offset some of the population trough impacts by allowing increased legal immigration. Yep, we’ll need more consumers, more taxpayers. We can start hacking away at the Federal budget, trimming away all the fat (that means substantial cuts in defense spending, too!), all the corporate subsidies, and reducing federal expenditures in general...but that’ll take political courage. Something we seemingly lack. We can revise our taxation policies (oh, I can hear the screams already!). Let’s at least start by eliminating all the loopholes (oh, my, we’ve been SO generous to the wealthy). We can initiate structural changes in our healthcare system...or we can bankrupt ourselves. It’s time for serious people to do some serious thinking. It’s long past time to jettison the “Trickle-Down” economics (a.k.a. voodoo economics) that led to this mountain of debt. It’s time to throw out all the pork barrel spenders, the shysters crying “Tax Cuts Pay for Themselves!” It’s time to stow away the ideological blinders and stop the sloganeering and political pandering that essentially keep us, as a Nation, with our heads buried in the sand. I say it’s well past time to put on our thinking caps and get serious. Ignoring the dark clouds on the horizon won’t make them go away. It’ll just make the coming storms worse. Demography is destiny.

Oh, by the way, the good times will return eventually. That Gen-Y generation (Boomer progeny) is mighty big, too. Give ‘em 20 more years or so and they’ll fuel another rip-snortin’ bull market (unless we saddle them with enormous debts and crushing inflation). I’ll be gone by then...but I wish them well. I hope they’ll have all the advantages I had. I’ve been a very lucky man.

* * *

(You just HAD to know THIS was coming:)

* * *