As last year drew to a close and Christmas loomed large on the horizon I sat down with Bushy Martin of the Get Invested podcast series to reflect on the year that was and offer my thoughts on the year to come.
Click this link to be taken to the episode.
There’s been a large number of doom and gloomers in the social media
and that the “stock market” is going to crash. ooh aah!
Every fund manager for the last 15 years knows or should have known
that monetary policy for the last 15 years has revolved aroud the baby
boomer conundrum.
15 years ago this baby boomer conundrum was all over the economic
news feeds. We don’t hear much of it today. Why?
The market is not the economy. This is a good thing.
Some relative facts:
Pension funds (government or other) are mandated to invest which
means they can only go long.
In 1960 (1940 – 1970), there were twice as many births as today.
Mandatory superannuation contributions came into effect in 1991.
About a third of the working population in the mid 1970’s paid some
form of superannuation and most of these were male.
The baby boomer generation is retirng today.
Now if you were born in 1950 then by the year 2000 you had probably
paid bugger all into superannuation. (from 3% in 1991 up to 9% by
2001). Maybe about 6% on average for 10 years. But you’ve been
working for 30 years!
Looking at this we can begin to see the complexity of the problem. We
have twice as many retirees today who have only paid half as much in
compulsory superannuation which are retiring today!
This is a global effect of WW2 (it affects the entire world), Now.
The only way to curb this massive pension debt is to make sure all of
these retirees accrue as much pension wealth as possible. Or else taxes
will have to increase dramatically to cover the government pension
debt.
With twice as many born in 1960 than 2016, you have twice as many
taxpayers retiring. So now half as many tax payers have to supplement
twice as many retirees. You can see where this leads…
Keeping interest rates low to devalue the return on government bonds
ensures that more of that invested money ends up in stocks, even
when PE ratios have doubled. (The money has to go somewhere).
Nobody wants to invest in negative yield. (Interest – Inflation)
The truth is, the US economy is doing much better than the doom and
gloomers actualy realise and so is the Australian economy.
Yes the market has been manipulated. Yes there’s a good reason for it.
Is the strategy 100% garenteed. NO, but it’s been working so far. So
far so good. Where else do you get a return on assets to feed the baby
boomers?
(If you increase interest rates on government bonds, the government has to pay this out at some point. If they can’t invest at a higher rate then they have to sell community assets and raise taxes. For this specific case, this is just not as viable as the alternative option.) The balance is large.
So how does this help you make a decision as to what to buy or sell?