Regular readers of this letter are well aware of the enormous headwind facing all assets classes caused by the retirement of 80 billion baby boomers, which started in earnest at the beginning of 2012. With only 65 million Gen Xer’s of the following generation, who is going to buy the assets of their retiring parents?
For longer-term investors, the big question is, “When does the headwind turn into a tailwind?” That would indicate when demographics shift from a barrier to asset price appreciation to an accelerant. According to my friend, demographics guru, Harry S. Dent, Jr. the short answer is 2023. That is the year when baby boomers cease to be a drag on the economy, safely ensconced in nursing homes, wondering if their diapers will get changed on time.
That will leave 65 million Gen Xer’s chased by 85 million millennials trying to buy their assets, triggering a 13-year asset price boom. A labor shortage will ensue, driving up wages, boosting consumer spending, and inflating another real estate bubble.
Globally, the picture is a little more complicated. Demographically, China and Europe will become dead weight from 2036, cutting into growth at home. The US will then experience a 12-year echo boom from 2045, taking growth rates back up. There are exceptions. Rapid population growth and rising standards of living are expected to keep India strong all the way to the late 2060’s.
When the markets start to discount the great economic boom starting in 2023? Looking at share prices today, you might guess that has already started. Please examine the last cycle for some clues. While the first baby boomer hit retirement age on January 1, 2012, the financial markets started to roll over five years in advance, in 2007, while the less liquid real estate market topped out six years ahead of schedule, in 2006. Check out the Case-Shiller chart below to see that I’m right.
This timing suggests that you should buy your new home in 2017, and load your portfolio with high beta risky stocks in 2018. But that is only if history repeats itself. Until then, try not to go broke.
Does this mean you aren’t supposed to buy any risk assets for four more years? That is a long time not to do a trade. The answer is that demographics are just one tool found in a huge toolbox filled with the dozens of instruments you need to make investment decisions. Rely on any one at your peril.
To read the demographics argument in all its glorious detail, please refer to Harry’s epochal tome of the subject in his recent book, The Great Crash Ahead. In order to obtain discounted pricing from Amazon, click on the book below.