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Fed Economists – “We see a 15 year Bear Market for Stocks”
The San Francisco Fed has come out with a research paper connecting the dots between the retiring baby boomers and stock prices. The thinking is that the boomers will divest themselves of stocks as they retire and eat into their savings. This is an old argument, but I still found it interesting.
The authors, Zheng Liu and Mark M. Spiegel have attempted to quantify the implications. Their principal conclusions:
We find that the actual P/E ratio should decline from about 15 in 2010 to about 8.3 in 2025.
The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021.
On the brighter side, as the M/O ratio rebounds in 2025 (BK: M/O = Baby Boomers die), we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010.
These conclusions are just horrendous! The suggestion is that there is a 15-year bear market in front of us. Multiples will fall by 50%!! I loved the “good news” from the report, that stocks might be 20% higher than 2010, but we have to wait 20 years to see that improvement.
Bloomberg interviewed Spiegel about this report. There was one comment that I thought was telling:
“We do see it as something of a headwind as the economy is attempting to recover.”
This is worst kind of "Fed Speak" in my opinion. These deep thinkers have it completely wrong. They think that the key to having a stronger economy is higher stock prices. So they spend all of their efforts dreaming up ways to keep the S&P ramping up. I think it is the exact other way around. If the economy were to be growing, it is reasonable to assume that stock price might rise. It is completely false to assume that attempts to jigger stocks higher will lead to a stronger economy.
The dog wags the tail. The tail does not wag the dog.
This is what we get for having academics from Princeton running the show. They have the cause and effect backwards. No wonder the economy sucks.
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This should have been realized since the Tech Crash
This shuld have been realized since the Tech Crash
Hey Bruce, bear in mind that politics is in play here so the tail can wag the dog in this instance.
Maybe not so much in the USA but in a place like Australia where pension funds are sizable per capita and very heavily invested in stocks, it is political suicide to allow the stock market to fall, particularly when the boomers are about to retire and they vote.
TPTB are going to try every trick in the book to keep this Ponzi going because it provides the boomers meal ticket and hurting boomers kick you in the polls. It will stay that way until such time as the boomers no longer hold the dominant voting block (because they're dead).
TPTB are fighting a losing battle but that doesn't mean they'll ever capitulate. First they tried to convince the next generation to cycle in and put up bids as the boomers sold out, but that didn't work because the next gens are broke and they're outnumbered anyway. No way can the next gens post inflows equivalent to boomer outflows. The strongest component of the Ponzi dynamic is broken.
Then they turn a blind eye to short-stop hunting bots because a high market is good right? Never mind the fact that those bots have now broken markets so badly that any hint of organic selling and a 6 month rally retraces in 6 days. So long as it's up at election time, they don't care.
Hmm, still not working. Not enough fodder to keep the Ponzi going. I know, why not try murdering US bond markets? Sure, why not, let's ruin the most important market in the world so that fixed income has no choice but to flee to high risk stocks in pursuit of yield. Sure that hurts some pensions, but they're minor %s so screw 'em.
Whatever it takes. Just get us to the next election and in the worst case if it all tanks, then try to find a way to blame the opposition / Chinese / Arabs / weather / ratings agencies, etc.
The most powerful voters feel that they are entitled to a bull market. They're too stupid to realize they've been sucked into a Ponzi scheme and they're going to be mighty pissy when the truth becomes evident. TPTB will try to hide that truth as long as possible even if it means the Treasury / Fed changes the law and becomes a direct stock buyer, or decides to put a floor in under private pension funds (insurance). End result of that is basically the same as paying public pensions. Whatever they decide to do they will, of course, screw it up royally.
USSA.
I would be very surprised if we don't see an economic upturn by 2020. I can back this up via historical cycle analysis.
http://econocasts.blogspot.com/
Substitute "Real Estate" for "Stocks" and you have the bigger picture. Ponzi bubbles and boomer demographics are not your friend. Then when interest rates start rising, bonds tank, too. Where to turn?
Really the research shows that bear markets last 13 years average, so what is 2 more years. But it is a question of where the starting point is.....well then it gets interesting. No?
"15-year bear market in front of us" they write?
Oh well, I stayed at a Holiday Inn Express last night!
like these idiots have any idea what the world will be like in 15 years....
OH but youre wrong...the world central banksters know EXACTLY what the world will look like 1, 5, and 15 years from now....their present plan to collapse all world economies is basically complete, now just to pull the rug out and collapse everything so they che banksters themselves can rule as kings of a 1 world govt,
Thanks BK,
Your posts are always worth my time.
This would suggest moving assets out of America. Have already moved a third of portfolio to Canada and Australia, but this suggests looking at demographic data closer. Canada and Australia are of course commodity plays combined with currency.
But Canada and Australia also have bad demographics, worse than the US. Maybe India?
Several retired folks I know are very depressed since they were counting on savings....hard earned lifelong savings to survive. Now The Bernank gives them zero interest.....
I think the theory behind the "wealth effect" is pure bunk. Unfortunately, the TPTB have swallowed it hook, line and sinker. I always thought that stock prices were an output, not an input.
TPTB haven't swallowed anything. They've created the perception so that they can be saved from their losses while the rest starve in abject poverty. The wealth effect is all about propping up TPTB and making them wealthier. That's the scam!
But, But, But.....
Warren Buffett says he has never been more bullish on the USA. He's buying railroads, and telling Obama to raise his taxes, and all that.
Meanwhile, the Fed says it must fight deflation by printing more and more money so that there will always be a liquid market for Treasuries and Mining companies' share prices are in the crapper as they earn record profits and build psychotic cash balances that they refuse to distribute to shareholders, and the Germans are going to raise taxes on their citizens to fund the redistribution of cash to people in other countries who have proven that they know nothing of the value of money, and the Chinese are building cities where no one can afford to live...
Oh, and Corn is still expensive, while real incomes in the US are still declining...
How is any of this bearish for equities?
/sarc
From earlier today
Roger Myerson, a Nobel laureate and a professor at the University of Chicago.
America Needs 8% to 9% Inflation
http://www.bloomberg.com/video/74294002/
8or 9% inflation is what you need to paper over $100 trillion in unfunded liabilities. Of course it does so by absolutely devastating savers and destroys the middle class. That's why we are in a Cold Civil War, this bullshit can't continue. http://www.futurnamics.com/civilwar.php
What a racket! All the IBs are 'selling' super bearish opinion. And then you have S&P dive bombing downgrade to perpetuate the myth that US is going into recession. If you look at U of Michigan Consumer Sentiment for August in historical perspective, you'll note that this is only the third time that this index reached this level since they started to keep track of it in 1962. If the UMCS would continue to sport even lower readings that would indicate that US was steaming into full depression: the thing is that other economic indicators do not support this.
And your point is. . .?
And just what economic indicators are you referringr to? The BLS data? Muhahahahahahaaa
Try Ceridain, pulse of commerce indicator. BTW, I've been watching UMCS since 2007. I am confident that'll it turn up again. As UMCS goes so does the market. The last two signals it gave was a BUY in 11/2008 and a SELL in 2/2011.
Excellent point. A signal that has been right twice in a row simply cannot be ignored.
Great post. When one adds in resource depletion and disfunctional politics(world wide) the future of PE ratio is contraction prone. Real wages look disasterous. Clumsy animals competing against the robots.
How long will the sheep believe that "job creators should be tax excempt and above any regulation".
This is bad news especially for all those who swear by stock index etfs. But then again, there were so many ridiculous projections coming out of the Fed over all those years - this might be just another one. Since it is a bearish one - for a change - people here believe it immediately though. or so it seems. Funny, indeed.
If we look 15 years ahead shouldn't we be talking of new paradigms, new mind sets, new ways of living? Instead of pumping and dumping assets in the same sterile life style mind set that has got us into this mess. Its time the FIRST WORLD actors, responsible for having created this mess, sit down and ask themselves where do we want to be collectively in 15 years. Instead of each one kicking the can and muddling along in their corner, denying the mega trends, as we have done since 2008.
i hear nobody on this sight, or elsewhere, trying to address all the issues to paint a coherent picture of what we WANT and HOW to get there. Given the situation where we are. If we had some consensus on this we could make a road map. Right now the Oligarchs are so desperate to save their skins at the expense of middle/low income classes in the first world, they are making things worse in their short term mayhem. No pilot in the plane. And its nose diving on its current course. SOrry to say so. The barn door is wide open for others to make the big plays of tommorow's game.
The issue now is paradigm change and setting a course to achieve it. Forget we lost Constantinople. Look for the new continent. Be in 1492 frame of mind.
1492 from who's perspective? Europeans, or Native Americans? Europeans gained colonies, productive land, wealth, potatoes, corn, ...Native Americans, disease and genocide and lost land....I'm feeling more like Native American in 1493 right now...
Its a globalised world. And the US is up the creek but not dead meat. My only point is that vibrant America, what's still left of it, is not showing any imagination and recouping capability.
I understand your sentiment. Those in middle america are seeing the storm waters rising. 1492 is now a universal reference, not specific to one continent.
I don't see the business and academic community coming out with a vision of tomorrow built on the problems of today, solutions, new horizons, that can fuel one or two vibrant segments of the US economy and also that of the world. We are all in this together. That's what globalisation is. The imbalances of the past ten years have totally fogged, bogged, dogged and smogged our collective eyes.
Dont tell Paul Krugman. He may end up being your fluffer if he ever gets it.
"This is what we get for having academics from Princeton running the show. They have the cause and effect backwards. No wonder the economy sucks."
some of the finest words uttered on the economy and quacks....but the princetonians are doing the bidding of their bankster buds and all will be rosy and well in the upper quintile....
Haven't we seen the same thing in real estate? Millions of baby boomers selling McMansions to fund their retirements? Never ignore the generational fundamentals. They are huge.
M / O -> Makers to Oldfarts ratio
"We do see it as something of a headwind "
Hmm.. so why do we sense this wind?
http://www.youtube.com/watch?v=OHt8CUhbJPk
As Bob Dylan said:
"You don't need a weatherman to tell which way the wind is blowing."
Did their model include any mention of ZIRP keeping us boomers on yield-quest?
And how the heck can they project what PE is gonna be appropriate that far out when people argue over what it ought to be today?
Bruce Krasting kicks those Princeton clowns in their buts.
http://www.businessinsider.com/fed-economists-predict-a-15-year-bear-market-for-stocks-2011-8
That p /e crap never made any sense to me as a performance or valuation metric. It can only be meaningful in a perfect world free of artificial props and voodoo accounting distortions. It's just another worn out sell-side gimmick in many cases.
More "insider buying" today. Fantastic opportunity and all that. /sarc
Wow, the Fed finally recognizes demographics. I wonder if they'll realize that, in older countries, real estate has typically been the bubble of last resort.
Retirement is deflationary.
Paradoxically, if you crash the market you force people to keep working. (maybe)
However, the gains in employment come at the expense of higher youth unemployment.
Pick yer poison.
I think people making economic predictions out to 2030 are foolish and therefore it would probably be useless to suggest they read some books bu Ray Kurzweil.
I predict that there is a 50% chance that they will be wrong, and that I will be dead.
I think people making economic predictions out to 2030 are foolish and therefore it would probably be useless to suggest they read some books by Ray Kurzweil.
15 years.... if there's no more crisis in this 3 to 6 year repetitive crisis cycle we seem to be in....
Does this also include the Future austerity plans or where those only to start in 2915?
More likely 2015.
Even more likely . . . . 2012.
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Just read that too... kinda put Japan's performance of the past 2 decades into perspective...
This is what we get for having academics from Princeton running the show. They have the cause and effect backwards. No wonder the economy sucks.
Spot on ...
The fat tail swan wags the market, at least for brief periods of time.
.......or, for the tail to wag the dog, just get a tail that outweighs the dog....Newtonian physics....