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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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