[Editor’s note: You are receiving this version of Markets and Money Weekend Edition as part of your subscription to Markets and Money.]
First things first. Were you watching Sunrise at 7.30 am on Thursday? And did it seem like Kochie, the personal finance guru and TV host, did not know that the Greek currency is the Euro? Or that it used to be the Drachma? Maybe we misunderstood. But his co-host asked about the ‘Greek Dollar’, which was bad enough.
Even if the media is clueless, now that the Greek crisis is plastered all over the news and the Aussie markets have started pricing it in, it’s time for the Markets and Money to move on to other issues.
As people have aged , a ‘baby-boomer bulge’ has formed in most developed nations . Check out this ABS population pyramid. It isn’t looking very pyramid like…
You can play around with the metrics here if you’re interested in how things will look in the future. But be careful. The Australian population pyramid begins to take on a very suggestive shape around 2030.
Anyway, as the boomers have grown older, they have had some rather interesting side effects on asset markets. Namely, as this group has gone through its wealth building, investing and liquefying cycle, it has left a trail of destruction. The weight of their money flooding into whichever asset class is popular has created bubbles. Then, when it’s time to leave those asset classes, the bubbles burst spectacularly.
When the boomers were middle aged, the craze was the internet and its infinite possibilities. Brokers piled their clients’ money into tech stocks, heralding the age of computers and virtual companies. The whole thing collapsed in on itself when the tech boom turned out to be a tech bubble. The companies that were funded by the boomers’ hard- won savings turned out to be worth very little, if they even got off the ground. Of course, the whole thing went contagious and stock markets around the world were dragged down too.
People learned from their mistakes and moved on… into housing.
Supposedly much safer than stocks, this asset offered several advantages over imaginary technology companies. ‘Bricks and mortar’, ‘house prices always go up’ and ‘just take out the equity on your house’ became the investment mantras of the day. Governments, keen to secure votes, supported homeownership policies and thereby prices. Each time things looked shaky, the central banks would lower interest rates, directly impacting the asset class of the day – leveraged property. The boom in finance was one pleasant side effect of this for the whipper snappers of the day.
In the countries where policies to support homeownership were most drastic, prices increased the most. From setting up government- sponsored entities to buy mortgages, to creating tax benefits for increased leverage, the politicians came up with it all in an attempt to stay in political favour.
And just when things were looking good, the housing bubble popped. The asset class that investors had been piling into crashed – and continues to crash. Just when the lessons from the tech bubble were considered learned, the same fear, destruction of wealth and chaos ensued. It may seem like Australia and a select few have escaped this fate, but that’s unravelling as we write.
Now that savings have been wiped out a second time, or are in the process of being wiped out, what do all those people looking at retirement do? Most likely, they will go to the most liquid and safe assets they can find. That is, cash and sovereign bonds. As a Markets and Money reader, you might recognise that they are setting themselves up for a third disaster. Inflation and sovereign defaults are on the horizon.
Financial advisors’ models tell clients that the young should invest proportionally more in growth stocks, the middle aged should hold more balanced portfolios and the old should be in liquid positions, to ensure they have cash in retirement. As baby boomers have gone through this cycle, they have caused a boom and bust in each – and the third is developing now.
There are several aspects to this. First (and most obvious) is supply and demand. The cycle begins with a sudden increase in demand when Boomers discover their new favourite asset class. Because of the weight of money they represent, Boomers inflate an asset bubble with their buying power. But as the boomers moved from asset class to asset class during their lives, they had to sell up each time. Because of the bulge in demographics, the buying pressure wasn’t there to support the asset markets that were being abandoned. The bubble burst each time.
The obvious Australian version of this will be when baby boomers sell the stocks accumulated in their super funds. Who will provide the buying power to prop up prices? The whole system is set to be under severe strain, simply due to supply and demand.
But that is only part of the story. As we alluded to above, politicians and civil servants love to get in on the action too. In the US, this took the form of making the ‘American Dream’ an American reality. What they got was a nightmare. Massive mortgage companies were set up and backed by the government to create artificial demand for mortgages. Banks were required to lend to sub-prime borrowers by legislation. Central banks kept interest rates low. And homebuilders had a field day.
It all ended badly. Homeowners were left without homes, banks with bailouts and taxpayers footed the bill. Those still in the stock market relearned the lessons of the tech bubble.
The Australian experience with a housing bubble is still playing out, but carries many similarities. Negative gearing laws are an example of how politicians got involved. Australia even has one of the most developed securitisation markets in the world. As for stocks, capital gains tax benefits versus interest encourage speculation in the stock market. So any excuse that Australia is different is just asking to be proven wrong. And already has been when it comes to stocks.
Without government attempting to create prosperity for its biggest voting block, things would not have swung as wildly from boom to bust in the past two decades. The baby boomers would have retirement savings to fall back on. Instead though, it looks like the perfect storm is forming for a third time.
In response to the financial crisis, vast amounts of money have been printed and vast amounts of debt have been taken on by governments. Whether it was bailouts or stimulus doesn’t matter. This can end in two ways. Default, as seems likely for European nations – and inflation – as is more likely for the US. Australia, with its comparatively limited government debt, is more difficult to judge. It has its own more pressing issues in an unstable Chinese economy. There, inflation and government stimulus are still providing all the upsides and none of the hangover. That will change.
So inflation and/or default are what global investors can expect. Coincidentally, the two assets that the baby boomers will increasingly be moving into are cash and sovereign bonds. As always, contagion won’t leave the Australian investor outside the line of fire. But consider the implications for the Western world’s baby boomers as a whole. Three booms, three busts. Each in the baby boomers’ asset class choice of the day.
And it’s not like the booms funded productive investment either. Tech stocks, housing and government are no way to invest in a prosperous economy.
So if the Australian housing bubble is popping, implying we will follow the UK and US into a housing debacle, what should an Aussie do? Well, you can’t choose your age, but you can choose your company. It’s unlikely that Australia itself will experience inflation anytime soon, and we happen to have some remarkably high interest rates compared to our Western counterparts. So, term deposit rates are looking rather swell.
But hold your horses. The money monopolists at the Reserve Bank of Australia look like raising rates further. When they do, it will be time to strike. Just be careful you don’t pick a wobbly bank! We’ll ask Sound Money Sound Investments editor Greg Canavan to take a look into the best pick.
Markets and Money Australia Weekend