Baby boomers

[turar]

In another thread, someone mentioned the concern of baby boomers retiring and slowly pulling their assets from the market over the coming years, probably starting now. It was dismissed as a concern, but I didn't understand the reasons for the dismissal. I've seen this issue come up every now and then, but somehow brushed it off and didn't pay much attention to it previously.

 

What is your thinking on the implications of this process on the general market values?

[ubuy2wron]

For every baby boomer selling to pay for living expensives there is someone else in the world on the other side of the equation purchasing because they need to grow capital for some reason. I think demographics can help in what companies you choose to invest but not when to invest.

[tombgrt]

Yes, I brought it up in the "what a frikking lovely day...to be reducing risk!!"-thread to indicate how the typical expert focuses on the wrong things (future concerns and hot industries) to allocate capital.

 

I simply dismissed it as a concern because it shouldn't, at any time, determine your market positioning. It is of irrelevance wether it comes to fruition or not, especially for value investors.

 

 

I have no idea of the possible impact, although I doubt it will have much effect on future valuations. New buyers will arise. If anything, this "bad thing" could bear opportunity.

[Packer16]

The only concern I have with the someone else buying my stock thesis is the gov't controls and restrictions which can prevent purchases in more centrally controlled economies like China.  If these controls become relaxed the thesis would be supported better but I think it is at risk due to these restrictions.

 

Packer

[ubuy2wron]

The only concern I have with the someone else buying my stock thesis is the gov't controls and restrictions which can prevent purchases in more centrally controlled economies like China.  If these controls become relaxed the thesis would be supported better but I think it is at risk due to these restrictions.

 

Packer

I think it has some application in a economy which is relatively closed and has little or no population growth, think Japan, but very little in a more open economy with steady population growth, think USA

[Packer16]

I agree but what I see eventually happening is when the baby boomers in the US hit thier peak selling years that will be offset by few buyers in the US but more in developing countries.  However, the key assumption is an open and free market for those developing country investors to purchase US securities.  That in my mind is the biggest risk.

 

Packer

[beerbaron]

Francis Zhou discusses this topic on the Ben Graham School video archive. I think he's referring to Buffett in it's speech. I'm not sure I agree with any of them (they say baby boomer's will increase the need for equities as they will need to reach for yield).

 

I kinda see is as a big balloon where air keeps being added (money), as air goes in the volume increases as well. But what happens if I start taking money out of the balloon? It seems pretty clear that the balloon has to deflate.

 

What I have not been able to model in the system is the impact of transition from producer to consumers of the baby boomer's. They will need money to live but where is this money going to come from if the younger generations don't produce enough for the boomers + themselves. Maybe some other on board have a better idea.

 

BeerBaron

[Packer16]

I think part of it will come from overseas as those producers are looking for stores and ways to grow thier wealth.  The only impediment I see is capital controls from central gov'ts. 

 

Packer

[turar]

http://www.frbsf.org/publications/economics/letter/2011/el2011-26.html

 

However, several factors may mitigate the effects of this demographic shift. First, demographic trends are predictable and rational agents should anticipate the impact of these changes on asset demand. Consequently, current asset prices should reflect the anticipated effects of demographic changes. In addition, retired individuals may continue to hold equities to leave to their heirs and as a source of wealth to finance consumption in case they live longer than expected (e.g., Poterba 2001).

 

Foreign demand for U.S. equities might also reduce the downward pressure on asset prices. However, the effect is probably limited for two reasons. First, other developed nations have populations that are aging even more rapidly than the U.S. population (Krueger and Ludwig, 2007). Second, there is substantial evidence of home bias in equity holdings. Individual investors typically hold disproportionate shares of domestic assets in their portfolios. For example, in 2009, the foreign equity holdings of U.S. investors were only 27.2% of the share of foreign equities in global market capitalization. While the low level of international equity diversification is still not well understood (Obstfeld and Rogoff 2001), it suggests that foreign demand for U.S. equities is unlikely to offset price declines resulting from a sell-off by U.S. nationals.

 

 

I'm not sure that extrapolating low international diversification of US investors to non-US investors is appropriate though.