The Companion Advisor:
Boomernomics: How baby boomers'
savings might boost financial assets
Twenty-five years ago, Canadian baby
boomers born in the late 1940s and early 1950s began trading their bell
bottoms and love beads for business attire. They got jobs and bought cars.
They got married and had children. Then they bought houses and furniture.
And they borrowed...and borrowed...and borrowed.
Competing against each other, baby boomers pushed up the prices of cars,
furniture, and other goods. That helped create double-digit inflation.
Competing against each other, they pushed up the price of money. That
helped create double-digit interest rates. Competing against each other,
they pushed up the price of houses. That helped create a massive bull
market in real estate which lasted until the late 1980s.
A bumper crop of grey hairs is now sprouting on those baby boomer heads.
The most important lesson for investors is that interest rates may fall
much lower over the course of this decade than most people imagine. That
means the prices of other financial assets, like equities, can continue
to rise substantially from the current levels already considered lofty.
In other words, baby boomers now appear to be doing to financial asset
prices exactly what they did to real estate prices in the 1970s and 1980s.
They may only be midway through this process and similar demographic forces
are at work in many other major industrial economies.
As baby boomers age, they pass the point of buying houses and furniture
en masse. Housing prices level off or decline, raising questions about
the value of real estate as a store of wealth. As grey hairs multiply,
baby boomers begin to think seriously about retirement and the need to
have some sort of financial nest egg. That basically leaves stocks and
bonds as the investment vehicle of choice. Competing against each other,
baby boomers then drive stock and bond prices to stratospheric levels.
What makes us think we may be only midway through this process? In the
1950s and 1960s, people tended to keep 40 to 45 per cent of their wealth
in the form of stocks and bonds, including their holdings through mutual
funds. In the 1970s and early 1980s, holdings of stocks and bonds fell
to around 20 per cent of total wealth as inflation pushed up real estate
prices and devastated the relative value of financial assets. That coincided
with the large-scale entry of baby boomers into the workforce, as shown
by the sharp decline in the fraction of the workforce above 35 years of
In recent years, the gradual aging of the workforce has meant a return
to financial assets as a means of holding wealth. Naturally, this has
created buoyant financial markets and relatively stagnant real estate
markets. As of early 1995, the share of households' wealth held in financial
assets had recovered to around 30 per cent. But that was still a far cry
from the 45 per cent level reached in the early 1960s. The share of older
workers in the workforce is projected to grow sharply by the end of the
decade. This trend should bring the share of older workers back to levels
last seen in the late 1950s and early 1960s. Against that backdrop, it
would not be surprising to see financial assets continue to gain favor
at the expense of real estate, with the share of household wealth in financial
assets perhaps returning to the 40 to 45 per cent range. If the decade-ending
workforce share is correct, it suggests that baby boomers are only midway
through the process of ramping up financial asset prices, just as they
did earlier with real estate prices.
Among the numerous political and economic implications of this demographic
story are two that have major investment implications: (1) As baby boomers
continue to grow in political clout, they will have a strong vested interest
in electing governments that keep inflation low and protect the value
of their retirement nest eggs. (2) Likewise, they will have a strong vested
interest in restraining government spending and taxes as they struggle
to accumulate wealth for their retirement years.
Perhaps it is no coincidence that central banks around the world have
succeeded in bringing inflation rates back to levels not seen since the
late 1950s and early 1960s. Perhaps it is also no coincidence that governments
around the world are under intense political pressure to trim spending
and move toward balanced budgets.
Interest rates are probably not headed back to 1950s levels anytime soon.
But investors should not underestimate the potential for interest rates
to fall to shockingly low levels over the next few years as powerful demographic
trends reinforce pressures for lower inflation and greater fiscal discipline
Sterling, Chief Investment Officer of Trilogy Global Advisors, LLC a New
York-based investment firm that manages global equity, balanced and income-oriented
portfolios. The team of 18 investment professionals, led by Chief Investment
Officer William Sterling and Portfolio Managers Robert Beckwitt and Greg
Gigliotti, manages over $4.7 billion on behalf of CI Investments. Trilogy's
unique investment process integrates top-down economic research and investment
themes with bottomup fundamental analysis and risk analysis.management.
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