Why is the economy slowing down? I argue Demographics are a big reason!

Why Are The Markets So Downtrodden?

I am and have been sitting here for some time pondering the markets. The markets have had me, and needless to say, many others, stumped. The economy is stubborn, business is not picking up and unemployment is not declining. Why is all this happening now?! 

I think I have some answers.

Some answers relate to the perfect storm of liquidity, the growth of the day trader, and the decline of the long term investor. The overuse of index funds and inherent liquidity pressures. The lack of patience in our instant answers, instant results, instant gratification, sound bite society.

Some relate to the vexing problems those massive regulatory changes from the Health Insurance, the Financial Regulation laws, and others. The politicians are panicking. Instead of slow, thoughtful, careful legislation that considers the unintended consequences. They are cobbling together monstrously sized, gift filled, and individual freedom killing laws.

These provide some of the short term answers, but not the underlying sea change that is driving the whole process slowly quietly behind the scenes. Like the slow currents of the ocean.

The underlying answer I believe is in the realm of demographics. Specifically it's the baby boomers that are the cause of the current problems. The boomers are not going to change because we will it, demand it, legislate it, or bring it to the light of day. However, it does put things into perspective and provide some guidance to our future actions. By realizing and understanding the underlying issue, we also can see opportunities.

We have a big “D” Demographics problem. Demographics is the study of the physical or actual population and their behavior individually and as a group. Several books have been written on this subject including The Age Curve by Kenneth W. Gronbach, and books that discuss the baby boomer bulge or the conceptualized “the pig in the python.” These ideas seem to offer some answers to what ails our economy and markets, in the US and worldwide.

How does this work? We do know that most first homes are bought by people between 25 and 30 years old. We know people reduce the purchase of ‘stuff’ as they turn 50, and start to reduce debt. We know most prepare to retire in there mid 50’s, about 10 or so years before they actually retire. We also know that when people retire incomes decline, and they spend even less money on ‘stuff.’ These actions are going to translate into serious public policy issues over the next 15 years, more on this later.

Baby boomers are generally considered to be born between 1946 to 1964 (18 years). The peak births were around 1957 (they are 53 today). The first of the baby boomers turned 60 in 2006, and are retiring between 2008 (at 62) and 2012 (at 66).  These are the beginning of an iceberg that contains some 76 million people!  Or about ¼ of the entire US population.

The next generations (the so called Generation X and Generation Y) find it difficult for many reasons to get ahead and many are back home living with parents. These generations are also smaller in population size. Consider baby boomers average 4.2MM per year, and the next generations are annually smaller. A big difference.  Add to this the difficult economy and you have more people acting ‘older’ earlier. This cumulatively is very powerful. Think depression era mindsets in the young.

What I find interesting is that all these people making their personal and individual or familial decisions effect the overall economy invisibly, but with phenomenal cumulative effect. This is the metaphorical “Invisible Hand.” The “invisible hand” was used by Adam Smith in his classic books The Theory of Moral Sentiments (1759), and The Wealth of Nations (1776). To paraphrase Wikipedia: ‘...the invisible hand is the cumulative affect of the forces of self interest, competition, and supply and demand.’

I see the baby boomers protecting assets as they enter retirement, or prepare for retirement, which will come en masse in the next 15 years. This has created interest in investments perceived to be more secure, such as annuities and government-issued securities..

Before boomers retire they cut their spending, reduce debt, payoff mortgages, and buy less ‘stuff.' Our economy is a consumer driven economy. How many times have you heard we have to get consumers to buy stuff. Well, 25% of the population is not buying stuff, they are paying off debt. This will, I believe, result in downward pressure on interest rates and inflation.

I think back to the early 70’s into the mid 80's when interest rates and inflation went through the roof. I then realized that the boomers were buying houses thus using all available credit and capital and forcing rates higher to attract more credit. Do the math and it is accurate. Today we are unwinding all that credit. Economics 101 says rates should stay down. The Federal, State and Municipal deficits are the wild card.

Japan is an example of just one country going through a population change. The change has caused a growing nation to retrench. Did they have a baby boom? Not in the same sense as we had a baby boom, but they have seen the size of the population decline. Could this be a lesson about our future? I think it is.

What does this mean for China (with its one child rule) and India?

What does this mean for the US?