Friday, November 5, 2010

Up, Up, and Away?

To believe that Qualitative Easing will heal the U.S. economy is to fail to comprehend the magnitude of the demographic shift that is taking place.  Qualitative Easing makes it easier for financial institutions to borrow money.  The lack of borrowing is the symptom, rather than the cause of the issue.  The real underlying cause is the shift in the habits of the Baby Boomers from being spenders to becoming savers.  The savings rate in the U.S. took a jump with the drop in stock markets, and more importantly, the price of homes.  The Baby Boomers are a group who are running out of time to prepare for retirement, whatever form that may take. 

I have read much about the maturing of the "me" generation resulting in a surrendering of the need for stuff in favour of basic values.  I don't believe the change is coming from the inside, but rather the outside.  Demographic research shows the peak spending years in a person's life is around the age of fifty.  One half of Baby Boomers reached that point in 2007.  Every passing day results in even more Baby Boomers leaving behind the age of peak spending than those who have not yet done so.

Check out this definition of a Ponzi scheme I lifted from the U.S. Securities and Exchange Commission website. "A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity."

Now, I am not saying what the Federal Reserve is doing is engaging in non-legitimate investment activity, but I think one can begin to see the similarities between the actions of the Fed and those of people engaged in a Ponzi scheme.  I fail to understand how more borrowing is going to solve the current debt crisis.  To me it is not a coincidence that the problems in Japan can be linked to the same demographic shift.  Sure, they made some serious errors in handling their situation, but any resolution can only come when we address the cause rather than attempting to treat the symptoms.

Being raised in the country, I have long been familiar with the saying, "You can lead a horse to water, but you can't make 'em drink".  Flooding financial institutions with cheaper money helps the financial institutions, but says nothing about people's need to borrow.  Still, it will probably take the experts a few months to discern the tea leaves and make any determination as to the effectiveness of QE2, this second round of Qualitative Easing. 

Bottom line for me is I am not participating in this stock market "rally".  The big reaction in the markets smells to me of a short squeeze.  After that, there is no telling how long before the denial turns into disbelief.  When it does, I will be betting against the markets, at least in the shorter term.  My prediction is the markets are going to end up lower than where they are presently.


  1. Hi, Ian,

    Thinking about the retirement of us baby boomers is much like watching a train wreck in slow motion.

    You can argue all you want about the implications but, unlike many other predicted catastrophes from global warming to oil shortages, it's an absolute fact that 80 million people start to turn 65 this year. Some have already retired.

    Will they all sell off all their stocks and bonds at once? No.

    But here's something that some commentators miss -- once they leave the workplace, they will STOP buying new shares of stocks. There go millions of dollars of buying pressure from mutual funds . . .

    And this is just in the U.S. There're many baby boomers in Europe (Canada too?) who are less likely than US boomers to plan to continue to work, full or part time, or start to businesses.

    What's going to happen to the EU when baby boomers riot for the old age pensions they've been promised since they were rioting hippies?

    Dr. Jeremy Siegel suggests that newly wealthy in developing countries such as China and India will buy up US stocks. That may be true, but not until the market goes down to painful, bargain basement levels.

    As time goes on, boomers'll sell off stocks that don't pay dividends, then either reinvest the money into stocks that do pay dividends (driving up their prices) or to pay bills or buy something.

    The DJIA is now about where it was eleven years ago. Eleven years from now, who knows? Stocks that don't pay dividends pay well be even lower.

    Buy dividend payers now, that's my advice.

    income investing blog

  2. Thanks for the advice, Richard. I know there are many people who prefer dividend paying stocks. My own personal preference is for capital appreciation. As you suggest, that may become harder and harder should enough people give up on buying stocks.


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