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The Great Baby Boomer Asset Bubble

Saturday, April 18, 2009, 12:03 PM

Below is a Martenson Report from February that I am now making freely available.  I referenced it in today's Financial Sense Newshour broadcast with Jim Puplava.  

This report states my arguments for why our experiences with steadily rising asset prices, mainly for stocks and bonds and houses, over the 1980's and 1990's may have been as much a function of simple demographic pressures as anything else. 

It's worth pondering.  


Where are we going, and what lies next? To address these questions, we need to know how we got here in the first place.

I want to share with you an interesting observation that I think will provide great clarity and insight into our current predicament, as well as indicate that our recovery, such as it is, will be protracted and incomplete.

Debt to GDP with Reagan box.jpg

Now, this is not a partisan statement by any means, because both parties played along, but Ronald Reagan's terms in office (1981-1989) are marked by the blue box. It was during his tenure that we initially began our experiment with ever-larger piles of debt. Somewhere in the early 1980s, we clearly broke out of a long-established normal range of debt and into new territory. Something happened there, but what?

Before I explain, let's make a few additional observations. What else was in play in the same timeframe that debt was exploding?

First, we must remember the US personal savings rate, which, as noted in the Crash Course, was inversely correlated (to a very high degree) during the same timeframe. As debt was climbing, savings were falling in lockstep.

Failure_to_Save_v2.jpg

Note in the image above that the erosion in savings began sometime in the early 1980s, slumping inexorably towards zero the rest of the way. But I want to be careful here in how I associate the first chart (above, the Debt-to-GDP chart) with this chart of savings. Certainly, they appear highly correlated, but this is not the same as saying one is the cause of the other. Correlation is not causation, and we should always endeavor to be careful to distinguish the two. Still, there is a very tantalizing symmetry between the two that bears exploration.

If I were to speculate, I would guess that the erosion in personal savings was not tied directly to debt, but to a sense of wealth and well-being. The Fed has produced plenty of research papers investigating something called "the wealth effect," which is the degree of additional consumer spending that can be estimated to occur as a direct consequence of rising asset prices.

For example, the Fed estimates that for every dollar rise in someone's stock portfolio, an additional 7 cents of consumer spending will result. The idea here is that people who perceive themselves to be wealthier will spend more than people who do not. That seems like a fairly defensible notion.

The wealth effect is a theory that has its fair share of critics, but it seems possible that people whose assets are rising steadily in price might feel less and less compelled to save money in the bank. Additionally, we could also consider that people with expanded access to credit for managing their cash flow might perceive less of a need to maintain a cash buffer in the form of savings. Credit becomes the buffer, especially if it's ubiquitous and easy to get.

Taken together, the decline in savings shown by the above chart could be attributed to an explosion of credit and generally rising asset prices. Perhaps we could also speculate that the federal government set a bad example during this same period of time and thereby laid the cultural foundation for spending and living "in the moment." Regardless of the reason(s), this phenomenon of zero savings has set the stage for what comes next, and we'll be tying this lack of savings back into the story a bit further down.

This next chart of total credit market debt illustrates the rapid and unprecedented expansion of debt over the past 30 years. This chart is really just a means of viewing the debt portion only of the Debt-to-GDP chart since it's the same data. But here it's easier to see the slight ripples in the data in the mid-1990's that led Alan Greenspan to panic and open the credit floodgates that are directly responsible for much of the condition in which we currently find ourselves.

Credit Market Debt - total.jpg

 

Now let's look at these next two charts, each spanning the last 30 years, with one for stocks and the other for bonds. In both cases, a rising line means a rising price. In short, both stocks and bonds entered a sustained bull market in the early 1980's and remained there for the next twenty years (stocks) to thirty years (bonds).

SP500 30 year chart.jpg

Bonds 30 year chart.jpg

A sustained bull market in both stocks and bonds is one of those things that causes me to scratch my head and want to dig a little deeper.

All of these charts collectively encompass my entire experience as an investor, my time as an adult, and even some of my teenage years. This means that I have spent nearly all of my life, year in and year out, living under a system of ever-larger debts, steadily higher bond prices, and stock prices that rose magnificently until 2000. If I put housing prices on here, they would look like the bond prices, only steadier in their rise, and steeper, too, as they have doubled and doubled again over the past 30 years.

How do we explain this? What can account for stocks, bonds, and housing going up while savings went down? Can we simply understand this as the natural result of a sustained credit bubble?

The credit bubble is only a partial explanation. To complete the story and understand why we face years of readjustment, we have to include the boomers.

The Baby Boomers

According to Wikipedia, "Influential authors William Strauss and Neil Howe label American Baby Boomers [as people born between the years] 1943 and 1960." This means that in 1980, the youngest boomer was 20, the oldest was 37 and the average was 28.5 (see table below).

Boomer_age_table.jpg

Why is this important? Because the boomers are the largest single demographics cohort in history, and they have exerted many well-characterized influences on politics and social structure. I won't go into any of that here, but will instead focus on what I view as the underappreciated economic and financial impacts of the boomer crowd.

The relevant detail here is that a person's income begins at a level of zero, and (on average) rises steadily to a point before declining throughout old age back towards zero. Where is the peak of earnings?

Again from Wikipedia, "Two decades ago, the peak earning years were between 35 and 44. Now they occur ten years later. Twenty years ago, those in their peak earning years took home about twice as much as workers between the ages of 20 and 24. Now they earn more than three times as much."

So peak earnings lie between the ages of 35 to 55 over the period we are discussing (1978 onwards).

This means that in 1980, when stocks and bonds and housing all began their journey into the wild blue yonder, the oldest of the baby boomers were just entering their peak earning years. What might we predict to be the collective impact of a gigantic demographics bolus moving through its peak earning years?

Well, accumulating savings and investing in such things as stocks, bonds, and houses are both highly correlated with earning power. Extrapolating across an entire generational demographic bulge, we might readily defend the idea that rising asset prices were at least partially, if not largely, driven by the rising earning power of the boomers.

Now let's take another look at the 30-year stock chart with the boomers' peak earning years (loosely defined as the time when the middle range of the boomer demographic was between 35 and 50 years old) marked upon it:

SP500_30_year_chart_with_boomers.jpg

Again, this might be a matter of correlation, not causation, but if the rise in stock prices witnessed over the late 1980s, 1990s and early 2000 timeframe was in large part due to a demographic bulge, then we could readily predict that stocks and bonds (and houses and everything else) will not be a sure-fire path to wealth in the future like they were in the past.

However, what goes up must come down. Those who save for retirement must also spend in retirement. So I invite you to consider the idea that our common experience with paper assets might be explained as a demographic dividend, as much as by the inflationary policies of the Federal Reserve or the fact that ample oil reserves were available to supply the economic expansion.

If this thesis holds, then here's what we might predict:

Tailwind of boomer investment turns into headwind of disinvestment

As mentioned in the Crash Course (in Chapter 14 - Assets and Demographics), there seems to be a slight problem in the model where one generation sells off its assets to the generation behind them. When there are more sellers than buyers, prices fall, and when there are more buyers than sellers, prices rise. So I must ask the question, "What will happen when the boomers seek to unload their assets to fund their retirements?" It seems entirely likely that we could see more sellers than buyers for a while. I am anticipating that this will create a sustained headwind that will grind down asset prices until a more proportional relationship to production is struck.

The great illusion created by the demographically-driven rise in asset prices was the notion that one could park excess money in some form of paper or housing asset and "get wealthy" over time. For a while, it seemed so simple. Buy the right index fund and sit back and wait. Just buy a house and wait. Just pick the right stock and wait. That's all it took to ‘get rich.' Right?

But if you stop and think about it, this is really not possible, at least not in aggregate and certainly not over the long haul. It is a cheap, temporary illusion. Real wealth is created by people producing things. Once a company has sold stock through a primary offering, no new capital is "invested" in the company, by virtue of the fact that people are bidding up its stock in the secondary market. So all secondary stock-market purchases are really just bets on the prospects of the company to earn future money, not actual capital investment.

The impact of the failure to save

Real wealth comes from actual production. Somebody, somewhere, has to turn sand into a silicon wafer, and somebody else has to turn that into a semiconductor chip, which somebody else has to turn into a computer. That's creating value. Along the way, it is vital that the property, plant, and equipment of these manufacturers be refurbished and replaced as necessary. Unless we want to fund these investments from a steadily rising mountain of debt that will someday collapse on itself, the borrowings must come from savings.

When I look around, I see nation that has failed both to save and to properly maintain its core capital stock. The bridges in my town are all "D"-rated or lower, many towns still subsist on dial-up Internet access, and practically every public building is due for a retrofit. These are local anecdotes, so take them with a grain of salt, but that's what I see.

On a larger scale, it is certain that consuming more than one produces and failing to save (two sides of the same coin) are a sure path to the poorhouse. Since the late 1970s or early 1980s, the US has been living well beyond its means, consuming more than it produces. We call this "the trade deficit," which is simply the measure of what we export against what we import. Specifically, imports are subtracted from exports, and a negative number means, "You're consuming more than you produce!"

This next chart of the trade deficit is a bit old (it comes from a seminar I gave in 2007), and I certainly should update it, but it would tell the very same story: The US is on an aggressive path to the poorhouse. To fund all that excess consumption, the US made the strategy-poor decision to borrow the difference from foreigners, a decision which will either destroy the dollar at some point in the future or cede a form of economic veto power to our future competitors.

Trade Deficit.jpg

Along with this foreign borrowing came the migration of our actual sources of wealth generation (production) to offshore locations, which, when you think about it, was a necessary condition, because we were not saving enough to fund the required investments here at home anyway.

The bottom line of this story is that debt represents a claim on the future, and future cash flows cannot forever be borrowed. Eventually they must reflect actual production. That is, future wealth generation must be of sufficient size to support future debt servicing costs.

Because the US made the extremely odd conjoined decision to both fund its excess consumption with foreign borrowing and send a large proportion of its wealth generation offshore, a future consisting of a vastly diminished standard of living is about as much of a sure thing as one can find.

Frankly, I do not see any possible way for the debt promises (see the Debt-to-GDP chart) to be kept. I see a future of paper asset destruction that will bring future promises and future production back in line. I don't know all the wrinkles and details, but I am thinking that the next ten years will see the US's debt obligations shrink back to something less than 200% of GDP. Along with that, the portion of our GDP that was false, because it was inflated by excess deficit spending, will be shrinking. I think that $25 to $30 trillion of (current value) debt destruction lies along that path.

The stimulus package, as large as it is, is merely a down payment.

This means that you might need to completely rethink your views on "investing" and how assets behave, along with how you will secure and protect your wealth.

The notion that everyone can "become wealthy" through entirely passive investments in stocks and bonds is a deep-seated cultural belief that is constantly reinforced by a self-interested financial services industry. But we each might benefit by asking ourselves, "Does this makes sense?" And, if it does not, we must then ask, "What might the implications be?" Whatever answers might develop in your mind, I invite you to trust yourself and to research the matter further if you are not entirely comfortable with them.

What next?

My purpose in writing about the true source of material wealth and the impact of baby boomers on stocks, bonds, and housing prices is to prompt you to seriously consider the possibility that the economic activity of the last few decades is misleading.

It is this disconnect between "how things were" and "how things actually work" that led me to make serious changes to my life. It formed the basis for my deeply held belief that the next twenty years are going to be completely unlike the last twenty years.

If you are like me, your beliefs about "how things work" were shaped during an anomalous period which will not soon be replicated in our lifetimes - if ever. It comprised a unique combination of demographics, geopolitical circumstances, a politicized Federal Reserve, supportive energy supplies, and corporatized media better suited to reinforcing consumer beliefs than delivering essential context.

In my estimation, this marks the beginning of a great leveling of expectations between what we promised ourselves and what reality can deliver. We are in the opening stages of a grand play with many acts and even more plot twists.

I intend this piece to give you one more tool in your toolbox that you could use in your discussions with your financial advisor, spouse, friends, or with whomever you regularly discuss our future financial prospects.

The final act in this play, I suspect, will be the destruction of the dollar, along with many other fiat currencies, as stores of wealth. You still have time to begin maneuvering your wealth out of fiat (paper) currencies and into tangible expressions of wealth, but in my experience, most people won't, until and unless their beliefs are in alignment with the necessary actions. For most people, most especially me, sawing at the rope that anchors our beliefs in the past is a slow process, with progress being measured by the breaking of each individual strand.

Conclusion

Most people cannot imagine a future any different from the present. For many people, the coming changes will bring unexpected shock, inconvenience, trauma, or worse. By thinking about these possibilities now and reshaping your expectations of the future, you will be far better prepared for the ride. Some people are already experiencing unexpected and perhaps unwelcome challenges in their lives due to the economic transition that is already beginning to play out. At this point, not many are expecting change to be imposed upon them, and even fewer have thought about where this change will carry them. But some have thought about it, and making even simple changes to how you think about the future can be...well, a sound investment.

A recent comment left at the site captures this dynamic perfectly, and I am pleased beyond words that Becca and I have been effective in achieving our goal of helping others to benefit from changing their thinking:

My partner and I attended the Feb 2008 Rowe workshop and owe you an overdue THANK YOU for what you taught us, how you reinforced our trust in our own judgment and urged us to act based on our knowledge and judgment. When we got home from the workshop we started with the simple things (food stores, changes to 401K positions) and over the past year have done more.

Four months after the workshop I was told that my job was being cut and owing to the insight and learning I got from you, I was in the right frame of mind to act quickly and benefit from what most would see as a disaster. My job was in a large city, distant from our primary home and we owned a small apartment where I lived during the work week. Within two weeks of getting the news that my job would end I put the apartment on the market and was able to sell it within 8 weeks (using Craigslist and pricing to sell). We used the proceeds from the apartment to pay off our primary mortgage and other debts. We are now debt free and, overall, better positioned to weather coming events. I attribute much of this to the two of you and your dedication to getting this information to out to others. You may also be interested to know that I have been distributing your first DVD to friends and have gotten very positive feedback and appreciation from those who've viewed it.

Our lives are a lot simpler, happier and we are excited about the future. I have become more involved in our local community and a couple of days ago I received an email asking if I would be interested in becoming the manager of a local farmer's market. Don't yet know if that will work out, but if not that, something else will.

Again, many thanks and warm regards.

And that, right there, exposes the primary purpose of the Crash Course, this article, and many other resources linked and posted at http://PeakProsperity.com: opening up your mind to the possibility of a future quite different from the past so that you can enjoy the luxury of a gradual process of adjustment where others might experience a wrenching transition. I invite you to give this some thought.

Your faithful information scout,

Chris Martenson

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10 Comments

joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
Re: The Great Baby Boomer Asset Bubble

supportive energy supplies,

i was surprised chris to see only this mention of energy in this report ( i have never seen one of the reports before, things like internet access and food absorb most of my resources)

since the crash course is based on the three e's i would have thought more mention of the role the cheap oil of the 80's would have figured more prominently in the analysis. not to mention the environment which even though at the beginning of the 80's was seriously degraded our natural capital was exponentially greater than it is currently .

one of the strengths of the analysis on this site is the linking of all the e's imho

perhaps that has shown up in other reports

LuciusQuintius's picture
LuciusQuintius
Status: Member (Offline)
Joined: Apr 7 2009
Posts: 5
Re: The Great Baby Boomer Asset Bubble

The argument about a generational dividend makes sense, Chris. I've thought that myself for quite some time. But there were also policy and economic developments that contributed to it - the movement away from pensions to 401(k)s led to more stock market participation, for instance.

 

pjc's picture
pjc
Status: Bronze Member (Offline)
Joined: Sep 26 2008
Posts: 30
Re: The Great Baby Boomer Asset Bubble

"The final act in this play, I suspect, will be the destruction of the
dollar, along with many other fiat currencies, as stores of wealth. You
still have time to begin maneuvering your wealth out of fiat (paper)
currencies and into tangible expressions of wealth, but in my
experience, most people won't, until and unless their beliefs are in
alignment with the necessary actions."

 

For people with 10,000 or less in savings and a low monthly income, without an option for additional work, gold does not seem an option. Buying useful things, building community, restraint in buying, new views of provisioning locally do make sense. I liked the comment from the man who may become manager of the local farmer's market and hope to read more stories of change.

BSV's picture
BSV
Status: Silver Member (Offline)
Joined: Jan 26 2009
Posts: 170
Re: The Great Baby Boomer Asset Bubble

At the University of Chicago, Dr. Richard Thaler and his colleagues have done fine work in the field of behavioral economics, also known as behavioral finance. Their work is fascinating. We humans are not entirely rational beings when it comes to financial decisions (and maybe in other ways, but I won't go there).

The point here is that most of our fellow Americans and other citizens of the world will very likely delay making any serious adjustments until forced to do so by events and circumstances. "The Great Baby Boomer Asset Bubble" makes that point.

But this human tendency to procrastinate may help keep things going for a bit longer and buy more preparation time for those of us who choose to prepare. Let us hope so -- and let us not waste any time in making our preparations. If everyone were to panic tomorrow, things could get ugly very quickly. They may anyway, but perhaps not tomorrow, perhaps not the next day. But soon enough...

maveri's picture
maveri
Status: Silver Member (Offline)
Joined: Nov 20 2008
Posts: 159
Re: The Great Baby Boomer Asset Bubble
BSV wrote:

...

But this human tendency to procrastinate may help keep things going for a bit longer and buy more preparation time for those of us who choose to prepare. Let us hope so -- and let us not waste any time in making our preparations. If everyone were to panic tomorrow, things could get ugly very quickly. They may anyway, but perhaps not tomorrow, perhaps not the next day. But soon enough...

+1

I totally agree.

I see the shift in people's mentalities already - slowly accepting the obvious

I spoke to people at my work last year and was laughed at.

Today, the laughing has stopped but the belief that it will still all come good still persists but everytime a company collapses or more bad news comes to the media there isn't the rejection of the underlining forces anymore.

In Australia the media are now starting to cover the failures and negative far more than before.

In the last week one of the main news papers covered a story by a financial analyst that said that if the downturn continued like it is that in six months time, Qantas airlines would be gone!

The next stage will be the general acceptance by the population at large - once that happens the quick slide/collapse will happen - it's the inertia of people's ignorance and the deliberate holding back of the situation by governments that's stopping the system taking it's natural course in my opinion.

EDIT:

Oh my - look at the dribble that's getting put out now by our media.

http://www.news.com.au/business/story/0,27753,25354779-462,00.html

"The Worst of the Great Recession is over"

EDIT2:

Well well well - if you look up that article have a read of people's comments. After a few hours I have never seen the likes of this before! People really disbeliving the article. People used to hang onto every little word of recovery - now the majority are just saying it's a beat up etc etc etc - people are catching on fast (in some ways).

EDIT3:

Here's a comment left about the news article.

Quote: 

Wow When I started debunking these rosy type reports back in October most people rubbished me. Now have a look at the comments - most people agree these people are liars and only telling you what they want to keep fleecing you of your money. I'm posting this time to say that together we will need to stand. Together as people and as a community we will need to stand because everything else will keep sliding. The past 10 years have been the most selfish I have ever seen - every man for himself bla bla bla - the wheels are falling off that old crap. I look forward to the years ahead beyond this mess because banding together and rebuilding community and people's sense of self-worth and not the corporations will be what gets us through in the end. Look around you, look in the mirror, that's where your answer will come from. Build up your communities because your going to need them and I need them too. Governments are just collectives of people - except they are without a clue! Don't look to them to help - look to your community and if it doesn't exist or is weak, then get cracking and build it up - it's all you'll have before long

Posted by: bob of sydney 6:38pm today
Comment 47 of 47

 

johnnybegood's picture
johnnybegood
Status: Member (Offline)
Joined: Mar 8 2009
Posts: 1
Re: The Great Baby Boomer Asset Bubble

Just checking.

Are all of the charts that are seen to be spiking upwards e inflation adjusted?

dfahrney's picture
dfahrney
Status: Member (Offline)
Joined: Aug 4 2008
Posts: 6
Re: The Great Baby Boomer Asset Bubble - Inflation Adjusted

They don't appear to be inflation adjusted.  

Take a look at this link for an astounding collection of inflation adjusted charts: http://www.nowandfutures.com/inflation_long_term.html

 And check out this version for the same charts log-scaled http://www.nowandfutures.com/inflation_long_term_log.html

 One more very informative set of charts on the possibilites of long-term value destruction in the markets is here: http://dshort.com/charts/mega-bear-comparisons.html?mega-bear-quartet-real-extended.  Be sure to notice that you can click the buttons at the top of the graph to change the variables!

 Best Regards,

David Fahrney

http://dollarcrisis.wik.is/ 

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: The Great Baby Boomer Asset Bubble

Hey Maveri, I think your "Bob of Sydney" poster is a lurker here....  check out what else he's written?

Mike 

It has been shown time and time again that the US government uses dodgy
stats. Have a look at how they have changed how they report on gdp,
unemployment numbers etc etc etc.
Check out shadowstats.com if you really want to know what the
true unemployment rate is - not the trumped up birth death model that
they use now that adds, yes adds, 130K+ jobs every months to the
figures. Have a look at Hedonics and see how they use this total joke
to keep the cpi index down to make things look better than they are.
The Australian government is just as bad with housing demand figures
too - Steve Keen debunks some of the so-called housing shortage that
the rba tries to imply exists. Governments want to keep people spending
spending spending which is why we are in this mess. Check out
PeakProsperity.com if you really want to see what is going to
affect us in the near future and why we should change - it's a lot
bigger than a financial crisis that's for sure - but don't expect your
government to fix it - no social change was ever driven by governments!
It's you and I who are the future of change - forget the useless
government who get paid and never fix anything of value. Look to
Community

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: The Great Baby Boomer Asset Bubble - Inflation Adjusted
WOW David, that was just fascinating.....  thanks for posting that.
Did anyone else notice how on so many of those charts all three lines cross over and meet around ~2000?  How weird is that?  Can anyone explain this?
Mike 
dfahrney's picture
dfahrney
Status: Member (Offline)
Joined: Aug 4 2008
Posts: 6
Re: The Great Baby Boomer Asset Bubble - Inflation Adjusted

 The charts at http://www.nowandfutures.com/inflation_long_term.html all cross-over at 2000 because the inflation adjustments all use the year 2000 as a base.  

The cool part of these charts is that they are continually updated and show both the 'official' CPI adjustments (blue lines) and John Williams' Shadowstats CPI adjustments (the green lines).  I only look seriously at the green lines and keep an eye on the blue ones.  The truth probably lies somewhere in between.

What do you all think of Doug Short's comparisons at http://dshort.com/charts/mega-bear-comparisons.html?mega-bear-quartet-real-extended?

To the truth!

David Fahrney

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