Gyroscopic Investing

I am posting this comment from the Gold section here as a new topic because it's more about stocks than gold.

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My belief is that stock market trends tend to track demographic trends.

When an economy is seeing a rise in the proportion of its population entering their peak earning and consumption years (ages 35-55), it's very good for stocks.  When those same groups start leaving the high production/high consumption demographic bands, stock markets start to suffer along with the underlying economy.

The first of the Baby Boomers began entering their peak earning and consumption years around 1982, which coincides almost exactly with the start of the historic 1982-2000 secular bull market for stocks.  Around 2001, the oldest Baby Boomers began exiting their peak earning and consumption years, which coincides almost exactly with the start of the current secular bear market for stocks.

The trouble with these demographics-driven market trends is that they tend to build on themselves as the demographic wave grows larger.  In the case of the Baby Boomers, they are still exiting their peak earning and consumption years, so it will be several more years before the beginning of the effects of the Baby Boomers exiting the workforce are felt.  The next shoe to drop in that process was the first of the Baby Boomers reaching age 65, which started in 2011, and will continue until the mid-2020s.

If Japan is any guide (they are about a decade ahead of us with their demographics), it will be a LONG time before the U.S. stock market does much more than trade in a range.  We've been trading in a range now for about 16 years, which is probably a heck of a lot longer than many investors were imagining back in 2000, but these things can sometimes go on for WAY longer than people think they will.  Japan has been trading in a range WAY below the all time highs in that market for about 27 years now.  I wonder what a Japanese investor who was told that stocks always go up if given enough time must think.  27 years and nowhere near the all time highs.  Not even within 50% of the all time high.  The Japanese stock market would need to double and then gain another 20-30% just to get back to the 1989 all time high.

These demographic factors can also create feedback loops that aggravate the problem as well.  In Japan, I get the impression that one of the reasons that marriage and having children has fallen out of favor is that it's so much harder to get a career started and to truly feel optimistic about the future with the stiff economic headwinds that never seem to stop blowing there.  With people having fewer children, the demographic problems will only get worse, and I can easily see the Japanese secular bear market continuing for another 20-30 years.

As I recall, during and in the wake of World War I as France realized it had lost a large chunk of an entire generation, its stock market took a dive and it took over 40 years for it to regain its footing and reach previous highs.

They never talk any of that stuff in Kiplinger's and Forbes.  Who would buy a magazine that said stuff like that?

Interesting perspective on stocks. I was gravitating towards a more stock heavy portfolio, i.e., 40/20/20/20, aka "The Golden Butterfly" but this gives me something to think about, especially since I plan on being one of the retiring baby-boomers next year. Harry S. Dent is big on the demographics thing and I've always thought of him as a purveyor of doom porn but maybe he is onto something.

Thanks for the very insightful post, MT. As an early boomer, actually hit 65 in 2010, it reinforces the notion to be in a stock light portfolio because of my age whether I'd be following the PP or a BH approach. This demographic trend, though, would mean that younger investors should be far less bullish about stocks which is a little depressing. It also mirrors the idea that there are limits to growth, an established ecological notion about natural resources, now also applicable to investing. 

Really nice post. MT, you more than anyone have helped me with my phobia of intermediate and long term treasuries.

Interesting. Could at least part of the rise be the proliferation of Defined Contribution Plans since early 80s be pushing more money into the market?

Then the question will be how fast Boomers pull out of stocks, and maybe the bull in bonds keeps going thanks to the Boomers.....

I found a cool website:
populationpyramid.net
It lets you visualize the population pyramids of every country, at any year.  Looking at the current US graph, I can see the baby-boomers, but there is plenty of people coming up behind them, so perhaps the total number of buyers of stocks will not actually drop much as the boomers retire.



Now these guys have some problems:


Sucks to be a Russian male.  Must be too much vodka:


China has a population pagoda:


Australia seems to be doing OK:


As a reference, here is what populations look like when life is rough:

Agreed very cool site. I've always wondered when financial experts tell young people to invest perhaps 90% of their money in stocks because they have plenty of years before they reach retirement and have then a high risk tolerance for something that historically does really good.

*Put on tin foil hat*
It could also be the case that this is all a giant pump and dump scheme.
1.) Realize that stock market might not do what it has in the past and you're nearing the point of cashing out
2.) Tell everyone (young, old, etc.) to invest in stocks, propping up and "artificially" increasing the stock market
3.) Sell your stock and laugh all the way to the bank.
*Take tin foil hat off*

It's one of the reasons why I went into the PP/modified-PP in the beginning back in 2012 for me. I blame MediumTex and Craig for influencing/corrupting my innocent mind with their so-called "facts". I have now been tainted forever because of them. Boooo!

Who says you should limit your stocks to the USA market?

Go international, or pick a specific country or region with favourable demographics. My PP stocks are VT, an internationally diverse ETF.

- Pete

Dieter wrote: Interesting. Could at least part of the rise be the proliferation of Defined Contribution Plans since early 80s be pushing more money into the market?

Then the question will be how fast Boomers pull out of stocks, and maybe the bull in bonds keeps going thanks to the Boomers.....

I can think of another couple of factors. 1) People who had first hand experience with the 1929 debacle dying off in greater numbers. 2) Computers really bumping up efficiency for a couple of decades.

Of course Volcker's attack on inflation was bound to drive money out of fixed income investments as well. There's not much incentive to take risks on stocks if you can get 16% returns on a money market fund.

Harry Dent suggested yesterday the next step in the demographic downturn will be the affluent cutting their spending.  THe top 10-20% (the folks with the most cash) will now slow down.  He picked Nordstrom, Tiffany's, Sotheby's, and others for example.

THe near- and intermediate-term futures may have much pain in store.

BTW, I read the USA may need to spend $1 trillion to fix the water supply infrastructure.  Where's that coming from? 

bedraggled wrote: Harry Dent suggested yesterday the next step in the demographic downturn will be the affluent cutting their spending.  THe top 10-20% (the folks with the most cash) will now slow down.  He picked Nordstrom, Tiffany's, Sotheby's, and others for example.

THe near- and intermediate-term futures may have much pain in store.

BTW, I read the USA may need to spend $1 trillion to fix the water supply infrastructure.  Where's that coming from?

I have a small (3%) position in $SH (S&P500 short ETF). The thought is we are overbought now, and we begin the next leg downward in the weeks to follow.

ochotona wrote:

bedraggled wrote: Harry Dent suggested yesterday the next step in the demographic downturn will be the affluent cutting their spending.  THe top 10-20% (the folks with the most cash) will now slow down.  He picked Nordstrom, Tiffany's, Sotheby's, and others for example.

THe near- and intermediate-term futures may have much pain in store.

BTW, I read the USA may need to spend $1 trillion to fix the water supply infrastructure.  Where's that coming from?

I have a small (3%) position in $SH (S&P500 short ETF). The thought is we are overbought now, and we begin the next leg downward in the weeks to follow.

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How did you come upon your 3% position in SH?

The 3% position in $SH is just to insure my spouse's equity holdings that I can't get into and change, in her retirement plan. So truth be told, we're not net short 3%, we're net short 0%. But if we start a waterfall decline below 1800 on the S&P, I'm thinking of putting in more, How much is a matter of much concern. I'm thinking a total of net short 5%, because anything less doesn't move the needle, but it is a extreme measure, and inverted ETFs are dangerous, volatility and daily rebalancing can make them decline in value even if the trade is going your way. You can lose everything!

We're only "trading in a range" if you were onboard at the peak in 2000 and invested no further.  There were two 50% dips since that time with another on the shelf.  Lesson: dollar cost average or time the market.

Am biding my time. I found a better short fund than SH, it's GRZZX. Just waiting, waiting, waiting...