"Something Evil this way comes........."

Thought it would be interesting to look at the impact that the structural changes now unfolding in the economy and those that will unfold over the next 10 years will have on the Stock Markets. The critical Demographic changes are going to change the face of the retail customer from a credit card junkie to a spend thrift looking for price trade-offs before making a purchase.

• The largest single demographic group of individuals in the economy are the "Baby-Boomers" who were born after WWII. This group had their peak spending spree top out in ~2000 and they are now retiring in mass. (See bottom chart on the Millennials)
• The big ramp up in the 1990's stock market was clearly driven, in good part, by the spending of these individuals as they educated their children, bought larger homes and purchased goods that reflected their growing income status. (See FRBSF chart below)
• Years of Governments trying to spend their way out of every bubble or crisis has generated debt burdens that can no longer be financed by the old adage of raising taxes. Companies and Government entities willingly gave away future entitlement payments to unions and employees figuring they would not be around when the bill came due, surprise, surprise.
• Normally the thing that floated all boats was a growing economy that produced more revenues each year and everybody would see the wisdom in leaving the problems for the next guy to fix. Almost four years later and trillions of dollars thrown at the problems and we have an unemployment rate that is stuck near 8.5% and that is only because statistical games are being played to mask the real number that is closer to 11%. (See second chart below)
• During the recession of 2008-2009 the U.S. economy destroyed  high paying manufacturing jobs at an unprecedented rate. It lost home-building jobs due to the bubble that the government induced and we are still sitting on a "phantom" inventory of unsold and foreclosure bound homes that could last for several more years. Many of the jobs lost here are never going to come back. Some will, but it could take a decade before we see enough to make a dent in the employment problem.
• As if growing unemployment problems weren't enough - even if you are lucky enough to find work it is likely to be a job with lower wages with few if any benefits. In general the workforce is working longer (hours) and getting paid less. (See chart)

Boomer Retirement: Headwinds for U.S. Equity Markets?
By Zheng Liu and Mark M. Spiegel (Federal Reserve Bank of San Francisco)

Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.

Lance Roberts StreetTalkLive.com

 "IF", employment was truly improving, we would be seeing these numbers begin to reverse course. They aren't, and the reason is due to population growth. During the last month it is estimated that the number of individuals of working age, 16 years and over, rose by 143,000 with the working age population now residing at 240.6 million. The offset is that, while job gains are modest and primarily located in lower-paying temporary employment for the end-of-year seasonality, the population continues to grow at an unfettered clip. In simple terms, the economy is not creating jobs fast enough to keep up with population growth.

Lance Roberts StreetTalkLive.com

    The impact on wages, as other inflationary pressures rise, hits the consumer where it hurts the most. We have discussed the fact that recent declines in wages and salaries combined with the rising costs of food and energy are consuming more of the household income. This bleed on incomes has led to significant slides in the personal savings rate and the ability for the consumer to continue to spend outside of the main necessities to meet their basic standard of living. This pattern is unsustainable, and sharp decreases in personal savings rates have historically been precursors to the onset of recessions.

Another large demographic group is on the rise to replace the "Boomers".  They are the 18-29 year old's or the "Millennials". This demographic group is very unlikely to have the same values as the retiring Boomers  and may not support a lot of the social programs currently in place. They are more likely to seek radical restructuring rather than minor tweaks. A case in point, the article (link below), gives you an interesting look at how this group views driving (a car) and how it will effect Detroit's Automakers for years to come.

http://www.detroitnews.com/article/20120116/AUTO01/201160362/Today’s-youth-a-tough-sell-for-automakers?goog

 


This is just the beginning of a long list of problems that have either been kicked down the road to be resolved later (now) or are outgrowths of the current economic situation that is blowing up in our faces. No matter how we got to this "perfect storm" of events, the only thing that matters is how are we going to financially navigate safely from here forward. I've heard it suggested that if we accomplish anything in 2012, but Armageddon, it will be a success.