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Thursday, May 18, 2006

Baby boomers will lead to stock crash?

Two weekend trips to California and the CFA test coming up on June 3rd means there won't be much time for me to post.

However, here's an article that interested me:

Will the stock market crash from baby boomers pulling their money out?

This Economist article presents two competing arguments. I personally side with Mr. Milken. From my personal observation, it seems that baby boomers are now expecting to live longer than they originally thought. Maybe it's the better health care or maybe it's the increasing social participation and acceptance of the elderly (as older people constitute a larger proportion of the population, the stigma and negative connotations of being "old" is reduced); whatever it is, to me it seems like there's a general sense of optimism as older people continue on with the rest of their lives. As such, I don't foresee any mass exodus from the stock market - baby boomers will still need to invest and grow their retirement porfolios, especially since retirement will now last longer than before.

Mr. Siegal's "great hope" of developing countries offsetting any shortfall in domestic demand in assets is a key point that needs reiterating. As developing countries get richer, their investors will soon need to put their money somewhere (developing countries might not have a robust stock market). This growing global pool of investors could more than offset any outflow created by baby boomers - the question is, would foreign investors put their money into US assets? Consider: transparent, well regulated markets and well managed companies vs. declining dollar, huge foreign debt, and negative foreign image. All this remains to be seen.


Anonymous Pragmatic Finance said...

Interesting point about the potential offset of demand from developing countries. I have to wonder how inticing investments would be with the declining dollar and large trade deficits. With the positives mentioned it almost seems to me that a foreigner would see the us stock market as more of a conservative bet until it was evident that the decline in the dollar would reverse course.

12:37 PM  
Anonymous Tim MMF said...

People in developing countries are not focused on investing, they're trying to get their basic needs met. I highly doubt they will be much if any cushion for millions of baby boomers pulling out their money.

However, that's not the first article about this topic. Robert Kiyosaki (Rich Dad, Poor Dad) wrote a whole book about it called Rich Dad's Prophecy.

2:22 PM  
Blogger justanotherblogger said...

Tim MMF,

Actually, there are a lot of "developing countries" (the term is odd because one can argue that many developing countries are more developed than western countries. Eg. Singapore vs. Portugal) that are very rich and developed.

Take Russia for example. While there are indeed lots of people trying to get their basic needs met, there also exists a large group of wealthy people. Russia has 33 billionaires, including 12 of the richest 100 people in the world (forbes 2006 billionaire rankings). Compare this number to a developed country like the United Kingdom - 24 billionaires and 2 in the top 100.

Expand that list from billionaires to millionaires and factor in the rapid growth that many developing countries are experiencing and you can quickly realize that there are A LOT of people with money to invest. By the time 2016 comes (the time when Robert Kiyosaki predicts the next stock market crash), these developing countries will be even wealthier.

Overall, I think you are underestimating the number of people that have money to invest. Developing countries aren't all poor.

I haven't even touched on the fact that investors in developing countries don't have solid stock markets to invest in (leading them to invest in the US). Maybe I will follow this up with another post sometime.

FYI, here's an article about Robert Kiyosaki. To sum it up, he's full of crap.

10:38 AM  

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