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gillies
Member Since:
20 Apr 2007
Posts:1
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20 Apr 2007 4:38 AM |
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Several high profile commentators are predicting a sharemarket crash sometime after 2010. This is based on the premise that the baby boomers spent in their youth, bought shares in their middle age and will sell these shares to fund their retirement sometime in their sixties.
Harry Dent, the author of The Roaring 2000s, predicts that baby boomers will continue saving until 2009. Dent believes they will do so to such an extent that they will drive the Dow Jones index up to 21,500 and perhaps as high as 35,000 (it is currently around 10,000). Then large numbers of baby boomers will retire and start selling shares to change to more secure fixed interest investments.
Dent predicts that this will mean the stockmarkets will crash and drive the Dow Jones all the way back down to 10,000 in 2013 and as low as 7000 by 2023. He also believes that interest rates will plummet as demand increases for interest-bearing deposits. Dent predicts that industries will suffer as baby boomers reduce their expenditure to adjust to a lower income.
Businesses may face uncertainty about the level of consumer spending and this will impact on decisions on production capacity as well as marketing.
Robert T.Kiyosaki, author of Rich Dad’s Prophecy, has the crash coming later, around 2016, more as a result of the collapse of the ERISA, There the USA Employment Retirement Income Scheme. This theory is based on the baby boomers turning 70 around 2016 and starting to withdraw from their 401(k) personal superannuation funds; their tax-free employee savings plans.
Kiyosaki believes that the massive under-funding of this scheme by huge corporates could lead to the collapse of the scheme. More than 20 companies have already defaulted on pension funds of more than US$100 million in the past three years.
The scale of the potential collapse was emphatically shown when United Airlines defaulted on US$9 billion pension obligations in 2005. Other airlines are in a similar position but the problem is not restricted to that industry. For example, General Motors has 2.5 retired workers on a pension for every one active worker as well as an unfunded pension debt of US$19.2 billion.
The total pension fund deficit for the S&P 500 companies is estimated at $350 billion. The US government liability for the unfunded portions is growing daily with no plan in place of how to handle this problem.
William Bonner in Financial Reckoning Day agrees with the studies that have found that the income of the individual is small in youth, high in middle age and small or nonexistent in retirement. But he feels the income of baby boomers in the eighties failed to match their expectations so they borrowed to maintain their desired high standard of living and this fuelled the rise of consumerism.
As a result, USA baby boomers did not save enough for their retirement and the average 50 year old baby boomer is still 60, yes 60 years away from having sufficient funds to retire on. In 2020, Bonner says there will be 116 million Americans older than 50 or 36% of the population of USA. Bonner wonders what will happen to the USA economy if these baby boomers decide they need to cut back their spending, pay off their debts and increase their savings in an effort to be better prepared for retirement.
Tim Bond, an economist at Barclays Capital in London, suggests in a paper entitled Dismal Demographics that the rapidly-aging world population is likely to be bad news for both shares and bonds. Bond argues that the long term outlook is likely to see slower economic growth, a gradual rise in inflation, a fall in share prices and rising long term interest rates.
However other analysts point out that the retirement of the baby boomer generation will not happen all at once in 2010. In fact, not everyone aged 65 will retire at that age. Many will want to continue working and others will have to work as they will not have sufficient money saved to allow them to retire. A recent USA survey showed that over 70% of baby boomers intended to work past 65. The US government is considering raising the retirement age as high as 69.
Plus there is the fact that the baby boomer generation is spread over many years and many will not be 65 until a decade after 2010. These younger baby boomers will continue to save and especially to spend as they will have reached their peak of disposable income. They also will be purchasing big ticket items with a view to having new cars and new appliances for when they do retire.
Other analysts make the argument that the newly-retired baby boomers will be a lot wealthier than previous retired populations that were prudent with their expenditure in retirement. The baby boomer generation has been estimated to be likely to consume more than twice as much as the working population. This means increased production will be needed.
The aging retirees will also require an increased number of services such as lawn mowing, housekeeping, house maintenance, leisure pursuits and the like. But there will be fewer people to provide those services as there will be little or no growth within the 18- to 35-year-old band. The combined impact of these factors produces the likelihood that prices of goods and services will increase as this demand from the baby boomers increases. This will make it more costly to retire and people will postpone their retirement to continue working.
For this reason, some financial analysts question just when baby boomers will shift their investments from shares to less risky bonds. Many consider this will happen much later in life than it did for their parents’ generation.
It is also possible that the value of the saved assets of the baby boomer generation will fall. If many of them are trying to unload their Telecom shares at the same time, the price will fall; especially as there are less working-age people to buy those shares. So if their asset values fall and prices increase dramatically, then many baby boomers will be forced to return to the workforce.
They will have to do so in order to meet the increased cost of goods and services when their anticipated income from investments has fallen.
More discussion on my website www.babyboomersguide.co.nz
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