The Scariest Chart of Your Children’s Retirement

How many dependents could your children support?

The correct answer is ‘not enough’.

One chart set to appear in your inbox next week spells disaster for your children’s retirement. It literally made us drop an apple into our coffee when it first appeared on our spreadsheet.

Source: Nick’s Desk

Pictures may tell a thousand words, but to understand what gave us such a fright, you need to understand the Life Cycle Hypothesis first.

When people are young, they cost their parents money. They reach adulthood and go into debt to start their life, often getting a mortgage to buy a home. Paying off the mortgage and seeing their own children become financially independent are two key moments when income for saving and investing suddenly become available. Both take place around say 45.

So the period between 45 and 65 is the period of maximum saving and investing — the period of a generation’s maximum demand for investment assets.

But after around 65, this changes abruptly. People go from demanding financial assets to supplying them. They suddenly begin to sell investments to pay for retirement instead.

So the key demographic relationship determining supply and demand for financial assets is the amount of selling by retirees above say 65 compared to the amount of buying by those in the stage of maximum accumulation — around 45 to 65.

Of course, supply and demand determine price. So the ratio of buyers to sellers can make prices move. Demographics, which determine demand and supply of investment assets according to the life cycle hypothesis, are predictable. That means they might actually predict investment prices.

The ratio of buyers to sellers based on the life cycle hypothesis is known as the M/O Ratio — the ratio of middle aged investment buyers (M) to the ratio of old investment sellers (O). When the ratio is rising, the number of middle aged buyers is growing relative to the older sellers. The demand outweighs supply and prices should rise. When the ratio falls, sellers outweigh buyers and the market falls.

Sure enough here’s what a chart of the ratio over time looks like next to the stock market over the same time frame.

click to enlarge

As expected, a falling M/O creates a bear market. A rising M/O generates a bull market.

So what does Australia’s future M/O Ratio look like? You’ll have to wait and see. But don’t eat an apple while you take a peek.

The only country to already experience a declining M/O ratio like the one heading for the western world is Japan. Here’s what the result looks like for the stock market:

click to enlarge

What I find fascinating is how the national psyche must have changed since the 90s in Japan. Having lived in Australia when it was very enthusiastic about Japan’s future, many of you would know more about this than us foreigners.

Taking a look at how the Japanese think about investing today might tell us where we’re headed.

According to our Japanese desk buddy Ben Otomo, today’s Japanese are diametrically opposed to Australia when it comes to how they see investing. He said the young don’t care or think about the idea of investment assets going up in price. The wealthy gamble on stocks, not invest. And the old think investing is a losing game.

Ben was talking to his family friends in Japan not long ago. He told them wealthy Chinese are investing in Tokyo property because it’s undervalued compared to other major cities around the world. Their response was simple. ‘Why would you do that? It’s going to go down.

In other words, the presumption has changed for the Japanese. Investments don’t have anything inherent about them that make them rise in price. You ask any westerner and he’ll tell you about how stocks and property go up in the long run.

The key to investing in coming years is how this perception is going to change. If the belief that investments in general go up in price disappears, the justification for investing will disappear with it.

So what does all this have to do with your children? Well, if the belief that shares and property go up in price disappears, why invest at all? That is a question the next generations will face. The baby boomers already placed their bets on stocks and property.

I expect coming generations will boycott the types of investment that require capital gains to make sense. Most shares and property are priced in a way that requires capital gains to make them decent investments. You don’t buy BHP for its 3% dividend yield. And rental yields in Australia are a joke.

The danger is what will happen to your retirement when the younger generation boycotts the stock and property market. Prices could plunge much faster than declining demographics suggest. That’s why you can’t wait for the crisis to come around. The selloff could be sudden and severe.

A report on your solution to this problem will be available soon. But in the end, demographics aren’t just about investments and the stock market.

How will the world look once we adapt to square population pyramids? If birth and death rates approximately balance out, what does that mean for how our society and economy works?

For example, every new house will make an old house obsolete. That is an entire new cost to add into the cost benefit analysis of building a new house in the first place. And what will happen to value of land if populations stop increasing?

Every working age person will have about two retired dependents. Is that realistic?

How will governments react fiscally? Will they take charge of the problem and make it worse? Will they be exposed as an unsustainable parasite we can no longer afford as much of?

Perhaps the most concerning question is how we will deal with debt. The amount of debt is a fixed number. If our ability to pay it off declines because of demographics, that will worsen the burden.

On the one hand, falling populations imply greater geopolitical stability. There is less competition for expansion and resources. On the other hand, geopolitical tension is just the sort of thing that can distract from a lacklustre economy according, to Japanese politicians and their prized islands. But that sort of geopolitical risk favours a cold war, not a hot one.

Family unity could make a strong comeback. Family is the welfare system that people rely on in the absence of government welfare or investment welfare. Interestingly, the German constitutional court ruled that German children can be held liable for something called ‘Elternunterhalt’. That translates to parental-wages. In other words, they can be liable for their parents care in aged care homes.

Of course, these are all averages and conceptual ideas. But they imply an incredible change in belief and value systems.  Maybe the news about people smuggling will one day feature how we send boats to Indonesia to steal aged care workers.


Nick Hubble+
for Markets and Money


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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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