Since I'm a long-term investor, I'm actually probably better served by a depressed stock market than a soaring one. After all, I am buying into the market, not selling out of it, so I want to buy low. At some point between now and when I start selling out, I want it to rise, but not for a while. So, while I see unusually hard days on Wall Street as buying opportunities, when I see jumps like today, I start thinking about maybe locking in that little bump and moving some stuff around.
Towards that end, I've been thinking lately about dependency ratios. The US has a pretty high ratio of dependents to working-age people (calculated by the World Bank as the ratio of people under 15 or over 64 to the people between 15 and 64). And it's poised to get a lot worse in coming years, as the Baby Boomers age. From the perspective of someone invested in US assets (stocks, bonds, and especially real estate), this is troubling. One would expect the Boomers to be selling off their assets to finance retirements, into a market where there are too few buyers who want them (unless people from younger countries buy in).
As of 2017, the World Bank says that we have 23 people over 64 for every working-aged person. In 20 years, it will be up around 40. This puts us where Japan was in 1994, on a path very much like the one they took through around 2014 (when their ratio cracked 40). That's troubling, in terms of stock values. The Nikkei 225 stood at 17,370 in 1994. By the start of 2014 it was 15,909. Over the course of 20 years, it LOST 8% of its value. Could we soon face something similar, as the massive Baby Boom generation tries to sell its stocks into a buyer's market, to finance retirement, even as an aging population causes consumer demand to flag, hurting fundamental corporate valuations?
When I have more time, I'm going to play around with a wider selection of age dependency ratios and national stock indexes, to figure out how consistent the trend-line correlations are -- maybe Japan is just a big outlier and normally countries age well past a 30 ratio without their stock markets hitting the skids. We'll see. From what I know of European markets, though, I'm skeptical. The European markets out-performed the US in the Bush years, when dependency ratios of major economies like the UK, Germany, and France had ratios in the 23 through 29 range. But then, in the Obama years, the US outperformed them handily, as our ratio went into the 20s, and theirs started crossing into the 30s. If that turns out to be a good guide, we could start underperforming soon (like Japan did at this stage), or in about five years (more like Europe).
In light of that, I'm thinking about where to put money other than US stocks. Real estate will probably be even worse, since you have the same problem of Boomers cashing out, but with less likelihood of foreign investors putting their money there to bolster things. Bonds have the same basic issues as stocks. Cash is a joke right now, with most places offering negative real returns. Crypto currencies have come down a bit, but I still think they're a speculative bubble. Commodities like gold are probably not a good long-term investment. So, where to go with one's money?
One possibility is looking for foreign stock markets in countries with better dependency ratios. I don't have enough appetite for risk to go to a country where there's no real democracy (Russia/China) or there's a risk of a revolution that could wipe out stock values entirely (e.g., nationalizing companies). But there are some fairly developed, democratic, and stable countries that don't have high dependency ratios. Korea is one (ratio of 19). Singapore is another (18) as is Chile (16). India is another intriguing possibility. It's a democracy and has proven quite stable, despite widespread poverty. The seeds are there for it to rise and the dependency ratio is just 9.
Over the short term, such countries could take a spill -- for example Chile could experience contagion from Brazil, or India could have a wave of sectarian violence. But if demographics are destiny over longer terms, those countries are poised to see their stock markets soar the way ours did as the Boomers went through the last quarter century of their retirement preparations -- or the way the Japanese did a couple decades before that. For example, twenty- and thirty-something tech types in Bangalore today will be forty- and fifty-something professionals in 20 years, plowing lots of money into stocks as they prepare to retire. So Indian stocks could ride up on that.
Any thoughts on the options?
Towards that end, I've been thinking lately about dependency ratios. The US has a pretty high ratio of dependents to working-age people (calculated by the World Bank as the ratio of people under 15 or over 64 to the people between 15 and 64). And it's poised to get a lot worse in coming years, as the Baby Boomers age. From the perspective of someone invested in US assets (stocks, bonds, and especially real estate), this is troubling. One would expect the Boomers to be selling off their assets to finance retirements, into a market where there are too few buyers who want them (unless people from younger countries buy in).
As of 2017, the World Bank says that we have 23 people over 64 for every working-aged person. In 20 years, it will be up around 40. This puts us where Japan was in 1994, on a path very much like the one they took through around 2014 (when their ratio cracked 40). That's troubling, in terms of stock values. The Nikkei 225 stood at 17,370 in 1994. By the start of 2014 it was 15,909. Over the course of 20 years, it LOST 8% of its value. Could we soon face something similar, as the massive Baby Boom generation tries to sell its stocks into a buyer's market, to finance retirement, even as an aging population causes consumer demand to flag, hurting fundamental corporate valuations?
When I have more time, I'm going to play around with a wider selection of age dependency ratios and national stock indexes, to figure out how consistent the trend-line correlations are -- maybe Japan is just a big outlier and normally countries age well past a 30 ratio without their stock markets hitting the skids. We'll see. From what I know of European markets, though, I'm skeptical. The European markets out-performed the US in the Bush years, when dependency ratios of major economies like the UK, Germany, and France had ratios in the 23 through 29 range. But then, in the Obama years, the US outperformed them handily, as our ratio went into the 20s, and theirs started crossing into the 30s. If that turns out to be a good guide, we could start underperforming soon (like Japan did at this stage), or in about five years (more like Europe).
In light of that, I'm thinking about where to put money other than US stocks. Real estate will probably be even worse, since you have the same problem of Boomers cashing out, but with less likelihood of foreign investors putting their money there to bolster things. Bonds have the same basic issues as stocks. Cash is a joke right now, with most places offering negative real returns. Crypto currencies have come down a bit, but I still think they're a speculative bubble. Commodities like gold are probably not a good long-term investment. So, where to go with one's money?
One possibility is looking for foreign stock markets in countries with better dependency ratios. I don't have enough appetite for risk to go to a country where there's no real democracy (Russia/China) or there's a risk of a revolution that could wipe out stock values entirely (e.g., nationalizing companies). But there are some fairly developed, democratic, and stable countries that don't have high dependency ratios. Korea is one (ratio of 19). Singapore is another (18) as is Chile (16). India is another intriguing possibility. It's a democracy and has proven quite stable, despite widespread poverty. The seeds are there for it to rise and the dependency ratio is just 9.
Over the short term, such countries could take a spill -- for example Chile could experience contagion from Brazil, or India could have a wave of sectarian violence. But if demographics are destiny over longer terms, those countries are poised to see their stock markets soar the way ours did as the Boomers went through the last quarter century of their retirement preparations -- or the way the Japanese did a couple decades before that. For example, twenty- and thirty-something tech types in Bangalore today will be forty- and fifty-something professionals in 20 years, plowing lots of money into stocks as they prepare to retire. So Indian stocks could ride up on that.
Any thoughts on the options?
