The great 20-year-long elderly trade
The great trade of the next 20 years may be out of the things that the old sell — houses, stocks and bonds — and into what they continue to consume: food, energy and medical care.
An aging consumer is the enemy of asset prices because she sells down the things she has laid up over a lifetime of working in order to fund her retirement. That includes housing, as older people downsize either to profit or to save money, and also financial assets, which the elderly “eat” to finance ongoing consumption.
One school of thought has had it that the U.S. will do relatively well compared to the rest of an aging world. While the Japanese working age population is already shrinking and China’s will peak sometime in the next decade, the U.S. is forecast by the United Nations to enjoy a steady increase over the next 40 years.
That may be a positive indicator for U.S. gross domestic product growth, but for asset prices the story is far less encouraging.
“Although GDP growth may be more closely related to the absolute growth of the working population, asset price inflation may be more closely related to the proportion of workers in the general population,” Albert Edwards, global strategist at Societe Generale wrote in a note to clients.
That makes sense: the more workers per populace the more people there are who are accumulating assets of all sorts.
From that perspective, the U.S. has peaked and is now looking at a long, slow 30-year decline. Taking Japan for an example, the outlook is not encouraging. Japanese real estate prices topped in 1992, just at about the point at which their own ratio of working age people as a percentage of total population also hit its high. Impose a 15-year lag on the U.S. and you have virtually the same set of circumstances. The year 2007, you will remember, was not good for either U.S. housing or stocks.
“As the former baby-boomers start to retire, this burgeoning cohort will tend to liquidate assets. This only exacerbates the secular bear market for property prices (which have already begun to decline again) as well as the equity market.” according to Edwards.
WHAT THEN SHALL WE DO?
So on that basis it will be a difficult few decades for U.S. house prices and other assets. This is going to be particularly galling to those who remain in the workforce, who will both face a higher tax burden to pay for entitlements and who will find their own attempts to save for retirement frustrated by poor returns in traditional markets.
To be sure, there is a good possibility that some of this will be partly self-righting. People will not retire as early as planned, both because the safety net may be partly withdrawn and because their own savings will not allow it. These “younger” old people may well save more, channeling funds into stocks and bonds as they do.
Nonetheless it makes sense to look at sectors such as energy, commodities and medical care which will be relatively less hit by a graying population.
While an older person consumes less of almost everything except medical care, they do continue to consume and thus their impact on commodity markets, and the shares of companies linked to those markets, will be less than on other sectors of the economy. This, in combination with rising living standards in the emerging world, may well put a floor beneath shares related to energy and food production, to name two sectors.
There is some evidence that older people actually don’t consume less energy, at least when measured by household consumption of electricity.
A review by Aachen University showed that in Switzerland the pattern was actually for slightly higher consumption among similarly composed households of older people as compared to their juniors, having fewer appliances but using them more. While younger people may simply be consuming their energy outside the house, it is far from clear that energy demand will drop sharply as the population ages.
Spending on food typically drops gently, a trend accentuated by people not in the workforce consuming less food in restaurants.
Medical care is an obvious beneficiary, though considering that it is largely publicly funded for the elderly in the U.S., budgetary limits represent a risk. The elderly account for about 60 percent of U.S. health care spending and buy 74 percent of all prescription medication.
Of course a falling tide may depress all boats, and many will seek better returns outside the U.S, but taking a very long view, you could do worse than sticking with what keeps the elderly warm, well and with bellies full.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. email: firstname.lastname@example.org)