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Baby boomers hold the key to recovery
Commentator David Frum.
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Tess Vigeland: Much ink has been spilled and airwaves filled over how we got ourselves into this economic mess. And now the speculation turns to when the recovery will kick in. But commentator David Frum argues we only need to focus on one thing: demographics.
DAVID FRUM: It's an old stock market saying: Don't fight the Fed. Here's another: Don't battle the Boomers.
Most of us go through an investment life cycle. We spend a lot in our 20s and 30s as we educate ourselves and form families. We start seriously accumulating assets after age 35. We become more reluctant to take risks and more averse to debt in midlife. And we start spending down our assets after age 65.
What happens when tens of millions of Americans try to do exactly the same thing at the same time?
Follow the boomers. The Baby Boom commenced in 1946. It crested in 1958, then tapered away in the mid-1960s. If you knew nothing else about American financial markets than this one fact, you'd expect asset prices to begin rising about 1981 or 1982, to accelerate into full-throated boom about 1993 or 1994, and to slow and cease their growth toward the end of the 2000s. And that's what happened.
Of course, other factors have an impact. The asset appreciation of the 1980s was driven by disinflation and pro-market policies. The boom of the 1990s was influenced by technological innovation and the opening of new markets in Asia and eastern Europe.
Still. Don't battle the boomers. Now the boomers are entering their retirement years. They will be huge net sellers of assets through the 2040s. Other factors may buoy asset markets. This one colossal demographic factor will depress them.
After all, if you happen to be a boomer, ask yourself: What is your personal plan for the years ahead? Buying stocks? A bigger house? Or repaying debt and accumulating liquid savings? Multiply your own preferences by the tens of millions, and you have predicted the future.
As children, teenagers, and young adults, the boomers have shaped America. Now they will do it as retirees. So as we try to foresee what the recovery will look like, here's a guess. The action won't be in assets. You never want to be a buyer when the boomers all want to sell.
Vigeland: David Frum is a resident fellow at the American Enterprise Institute.
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1) The Bureau of Labor Statistics has noted that for the Younger Boomers (1955 - 1964), "Debt is Part of Their Lifestyle". They have no financial assets, but most have real estate. When they lose the income from their job, expect them to sell their houses to continue their lifestyle.
2) As for the richer, more responsible boomers, It's true that retirees are deferring retirement and retirement account draw downs -- but that's bad. By law, at age 70 1/2, they are required to take mandatory distributions at mandatory percentages based on their life expectancy. This means lots of forced selling in the near future by a huge demographic. They will only be able to reinvest after-tax money, so the net negative effect is at minimum the spread between the pre-tax and post-tax value of financial assets.
So if Mr. From thought the sell-off was so predictable, why did he support the privatization of Social Security, knowing what would happen to people's retirement plans when everyone wanted to sell, according to his flawed theory?
Like other conservative business think tanks, the AEI doesn't want government interference, wants the invisible hand to work, then declares in their "about us" section they are a not-for-profit, government hand-out organization. Talk about both sides of the mouth!
Ric Edelman, a highly acclaimed Financial Advisor, best selling author and national radio show host and educator devoted a whole chapter to convincingly demolish Mr. Frum's theory in "The Truth About Money. The sad truth is that most boomers don't have assets to sell, and those that do won't sell them all at once. Read the book for full explanation.
This story is missing an important part of the equation: Generation Jones (born 1954-1965, between the Boomers and Generation X). Given the huge differences between Boomers and Jonesers re. finances/spending/retirement attitudes, this is a very important variable.
Google Generation Jones, and you’ll see it’s gotten a ton of media attention, and many top commentators from many top publications and networks (Washington Post, Time magazine, NBC, Newsweek, ABC, etc.) now specifically use this term. In fact, the Associated Press' annual Trend Report forecast the Rise of Generation Jones as the #1 trend of 2009. Here's a page with a good overview of recent media interest in GenJones: http://generationjones.com/2009latest.html
It is important to distinguish between the post-WWII demographic boom in births vs. the cultural generations born during that era. Generations are a function of the common formative experiences of its members, not the fertility rates of its parents. Many experts now believe it breaks down more or less this way:
DEMOGRAPHIC boom in babies: 1946-1964
Baby Boom GENERATION: 1942-1953
Generation Jones: 1954-1965
Generation X: 1966-1978
Mr. Frum- So if we shouldn't be buying because the Boomers will be selling what then do you suggest for us leading Gen-Xers (in our late 30s & early 40s) whose only retirement is our 401k? Real estate has lost its punch & now the stock market is out. We're already going to have to live with the aftermath of the Boomers on Social Security & Medicare (which likely won't survive the generation & will leave Gen-Xers with nothing). So if our 401k & savings are all we have - how are we supposed to invest it so we can at least have a roof over our head & food to eat in retirement?
David Frum's claims to fame are that he wrote the biography "The Right Man" about Dumbya Bush, then he and his wife went around trumpeting how Frum coined the term "Axis of Evil", which Dumyba used to define his simple-minded and ultimately horrific foreign policy. Nitwits like Frum and Bush were born on third (thanks to money and positioning from their families) and pompously believe they actually can hit the ball. The AEI is filled with silver-spoon sucking Neocon nitwits like Frum...why ANYONE still listens to these jackasses is beyond me.
I agree with Mr. Yourke. Mr. Frum's comment "You never want to be a buyer when the boomers all want to sell," makes NO sense to me. I think the most opportune time to buy is when everyone else is selling. Discounts will reign supreme.
Yes, BOOMERS have had an extreme impact on asset values, but they are not the sole driver. Not only is there potentially going to be a great bargain as boomers divest, but there are plenty of gen x, y, and z consumers and producers following behind them to continue the economic growth our country and other nations. Future technological innovation and the opening of new markets in Latin America and China will also contribute to growth overall.
And what if the BOOMERS don't retire as a large group, but live & work much longer. Many are continuing to work well into their 70s and beyond, some not selling their retirement account equities until their late 70s and 80s.
This ride could be way less predictable than Frum asserts. I look forward to seeing this play out.
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