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Thursday, January 12, 2012

"It's the Economy, Stupid !" First of Three : Demographics = Destiny ?

As far as the value of risk assets is concerned,  Nicholas Pardini answers,' Yes !'

For Pardini's reasoning, check out his SEEKING ALPHA post, "Why A Demographic 'Great Sell Off' Will Anchor Down Markets", excerpted below.

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Due to the eventual retirements of the Western and Japanese baby boomer generation and the economic struggles of young people across the globe, I expect a global "Great Sell Off" on risky assets such as stocks, venture capital, speculative real estate, options, and commodities in favor of lower risk and income focused investments.

[This is largely a function of the] heavy concentration of assets disproportionately controlled by those over fifty and retirees. Once these people start to retire and or die off, they will need to sell of their financial assets and real estate to cover retirement expenses or the needs of estates. The problems lies in the fact that during the time when the elderly liquidate their assets, the smaller and poorer youth will not be able to afford to buy these products at their previous highs. Factoring out inflation expectations, these investments will need to be sold at fire sale prices as desperate sellers will need the money to support retirement living or for paying estate taxes.

What does the "Great Sell Off" mean for investors' portfolio strategy [?]  Keep money in liquid securities such as stocks, cash (watch out for inflation risk), or liquid ETFs of commodities and bonds. Committing money into a long term bond, CD's, or real estate would be a bad idea as pressured selling throughout the next decade will open up bargain opportunities in the future. Also, quality companies with high dividend yields (DVY) will trade at a premium to historical averages due increased retiree demand. Capital inflows from retirees will also have similar effects in the high yield corporate bond market and government debt stable nations such as Australia (AUD, New Zealand, Switzerland, Chile, and the Scandinavian countries. Growth stocks in US and emerging markets equities on the other hand can underperform due to changes in older investors risk capacities and the lack of capital coming from young investors who can afford to take the risk.

Due to a combination of disparity between the current wealth and future income levels of baby boomers and those currently under 35 years old, I expect there to be a "Great Sell Off" in risky assets and a transition of capital to fixed income and high income paying stocks. The delaying of retirement among many baby boomers may slowdown this trend and lower the volatility of asset declines, but the same pressures will still be intact. Investors need to pay attention to this trend because it may cause severe macroeconomic tensions (such as a Japanese debt crisis) in the near future. Valuations of specific asset classes such as dividend stocks or speculative growth companies must also be analyzed differently in this new demographic paradigm.

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