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SF Fed Warns US Equity Valuations Will Be Cut In Half In Next Decade
When "the retirement of the baby boomers is expected to severely cut U.S. stock values in the near future," is the ominous initial sentence from no lesser maintainer-of-the-status-quo than the San Francisco Fed's research department, one begins to recognize the Federal Reserve's overall need to hyper-inflate asset prices at whatever cost for fear of the 'wealth' destruction looming. As the following study reports, projected declines in stock values - based on the latest demographic and valuation data - have become even more severe. Our current estimate suggests that the P/E ratio of the U.S. equity market could be halved by 2025 relative to its 2013 level.
Excerpted from FRBSF's Global Aging: More Headwinds for U.S. Stocks? (Liu, Spiegel, & Wang)...
Demographic patterns have a strong historical relationship with equity values in the United States (Liu and Spiegel 2011). In particular, the ratio of those people who are the prime age to invest in stocks to those who are the prime age to sell has historically served as a strong predictor of U.S. equity values as measured by price/earnings (P/E) ratios.
Research suggests one reason for this close relationship is a person’s life-cycle pattern of investing. An individual’s financial needs and attitudes toward risk change over the years. As retirement approaches, individuals become less willing to tolerate investment risks, so they begin to sell off stocks. Thus, the aging of the baby boomers and the broader shift of age distribution in the population should have a negative effect on capital markets (Abel 2001). In theory, global demographic changes may further impact U.S. equity values. For example, Krueger and Ludwig (2007) demonstrate that U.S. returns can import the adverse impact of population aging in other countries.
Since the study by Liu and Spiegel (2011), U.S. stock values have increased markedly. Between 2010, which is the end of their sample, and 2013, the Standard & Poor’s (S&P) 500 Index has increased by 47% and the P/E ratio has increased from around 15 to nearly 17. However, the bearish predictions in Liu and Spiegel (2011), which were based solely on projected aging of the U.S. population, have worsened. Indeed, extending the Liu-Spiegel model’s sample through 2013 suggests that the P/E ratio will decline even more, from about 17 in 2013 to 8.23 in 2025, before recovering to 9.14 in 2030.
Following Liu and Spiegel (2011), we use Bloomberg’s P/E ratio for the United States, which is the ratio of the end-of-year S&P 500 Index levels and the average earnings per share over the previous 12 months. We measure the age distribution using the ratio of “middle-age” people between 40 and 49 years—the group most likely to buy stocks—to those in the “old-age” group from 60 to 69 years—the prime age to sell. We call this measure the M/O ratio.
Figure 1 shows the M/O ratios in G-7 countries from 1954 to 2010, extended to 2013 for the U.S. sample.
The figure also shows the projected M/O ratios through 2030 based on the UN population projections. The M/O ratios in most G-7 countries peaked by the mid-2000s and are expected to decline through at least the mid-2020s. For several countries, the declines are expected to be even larger than in the United States, which is projected to decline from 0.76 in 2013 to 0.60 in 2024. For example, the Canadian M/O is projected to decline from 0.82 in 2010 to 0.53 in 2024, and the German M/O is expected to decline from 0.90 to 0.48.
...
In theory, the rapid aging of the global population is likely to have additional adverse implications for U.S. stock values. Ang and Maddaloni (2005) find that using the fraction of retired people in the population predicts excess returns in the four largest equity markets outside the United States. Evidence also suggests that U.S. and foreign markets are integrated. This implies that if a tight relationship exists between the M/O ratio and P/E ratios in foreign economies, their demographics are likely to impact U.S. equity values as well.
Figure 2 summarizes the statistical relationship between the log of the P/E ratio and the log of the M/O ratio for each country.
Consistent with our finding using the M/O ratio as a demographic measure, the fraction of retired people in the population has a significant negative relationship with the P/E ratio for the United States.
...
In conclusion, we first extend the U.S. sample studied by Liu and Spiegel (2011) to include more recent data, demonstrating that the projected declines in stock values based on these data have become even more severe. Our current estimate suggests that the P/E ratio of the U.S. equity market could be halved by 2025 relative to its 2013 level.
* * * So if multiples are only going to collapse, due to demographics, there is only one thing for it... ZIRP-funded robot-armies enabling total unemployment but spiking profitability (paid for by transfer payments monetized by The Fed).
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Next DECADE!?
Moar like next few months!
I know!
Obongo can write a memorandum banning aging.
US Equity Valuations Will Be Cut In Half In Next Decade?
NO!
It will become worthless in less than teen years.
It'll be cut in half by next Christmas. IMHO. 60% probability.
Next DECADE!? Moar like next few months!
I disagree. The FED is going to sacrifice all to keep the stock market inflated. Housing Bubble 2.0 popping and a protracted period of low oil prices should put more discretionary income in Joe6pac's pocket. If they can get consumption up through lower COL and some increases in the minimum wage they can keep the market at high nominal numbers. I'm almost certain we're going to see student loan forgiveness before Obama exits. I think the FED is all in on juicing consumers so that this market holds on as long as it can.
Remember the second half of the 90's when RE, energy, etc were low and the stock market was rocketing. That happened in an environment where consumer spending was strong and NOT based on exponential household debt. I think we could see that again.
Too much debt has been created since the 'rocking 90s' for a replay. Boomers are going to have to lose 50% of their wealth before the ship can sail on.
I don't disagree. The Tahiti vacation retirements of Boomers ain't happening. But as many have said they can keep this game going longer than we can be against them. Hedging against a not here bull run or 3 seems dubious given the FED's tools.
The SF Fed is a joke. In fact the whole Federal Reserve is full of shit.
Jim BullTard of the St Louis threatened to impose QE 4. Which is it?
This is not your Father's Federal Reserve. Gives one the impression those managing it are making it up as they go along which is real dangerous.
When the fuck have these people EVER gotten a forecast right? Bernanke and his statements thAt the subprime was "contained" comes to mind. And all those hocky stick recovery graphs that every year show the same hockey stick moved ahead one year. When the fuck are people going to wake up?
Who?
If it weren't for fed intervention stock values would be more than halved now. Wake me when we see S&P 666.
More like 6666.
Zimbabwe style.
Central Banks= Bagholders.
Central Bank=Bad Banks
Future Generation Taxholders=Bagholders
In Belgium, our railroad company which employs over a 100k people, need to find 50% of new staff because 50% of the current staff is retireing next year.
it just made me think....
In less than a decade from now, we’ll have massive employee shortages in the west...
and those who shpuld be training to replace the most important jobs to keep everything going... are sitting at home with their parents because nobody wants to train them...
and sure I like robots and software... but they’ll never replace enough.
it will look like the employee shortage after the black plague ravaged europe in the middle ages. And shareholders now refuse to realise this and threat their employees like dogs.
Not sure… I am a little undecided…. Here’s why:
Sudden Debt: "it will look like the employee shortage"
Putin's Advisor: “There is a war coming in Europe.” Do you really think this ruling matters?”
putin's advisor is making a political statement; or airing an opinion. Sudden Debt's point about the employment situation, whilst probably exaggerated, is one step of logic removed from a demonstrable fact.
Goed opgemerkt, maar ik wil het daar graag eens over hebben met jou !
Zeg maar :) en dan maken we er hier opeens een vlaams blogje van :)
Kill anyone over 50 with a pension..the ponzi must continue
Well... if you’re 30 now, you’ll be over 50 when the real shit will hit the fan. And well... they’ll indeed will be calling that... and they’llbe pointing in your direction. I’m 38 myself and fully aware of that future.
It's a despicable thought but it's just about the only thing that will relieve the demographic issue and the accompanying problems of unfunded liabilities and increasing medical costs.
Sometimes I wonder whether they are going to achieve this by finding an age related fatal virus.
Just lower the price of viagra to 5 bucks per box and make it available over the counter and 90% of all seniors above 50 will drop death of hart faillure within a month!!
As a 48 year old please accept my sincere "Fuck You."
;)
I'm 62 so we might be on the same side on this one. I will have some lead to send out free to anyone who tries to mess with me. I will even let them pick up the brass if they can.
The only thing that will sadly remain relatively cheap going forward is the cost of a human life.
This article is right on the money!
Yeah, like the SF Fed trying to not too openly demand "Print MOAR!"
The shares they need to sell will be bought with freshly printed money. Problem solved.
I suspect we won't have to wait anywhere near 2025 to see equity valuations halved. My guess? 2016 at the latest.
But with the value of money quartered, the sticker value will be doubled!
there are a billion people + in china and india. and i hope you like them, because they are going to overwhelm you very soon, if not yet. i am in nyc and done already. bombay on the hudson.
They based all of their research on P/E Ratio?
Ya, that's meaningless when the FED has a printing press and is not afraid to use it.
I don't see this happening. In the next decade I think we'll see Dow 6-figures. That would be, what, a lilttle more than 5-fold increase? Of course, the currency denominator will be worth about 1/8th as much by then. We should be on QE 27 by then, if we're still bothering to keep score.
And I imagine some major companies might have Berkshire A-style stock valuations, but only a few hundred outstanding shares. By that time the average person won't have any stock market exposure at all, and any retirement savings (ha-ha-ha, that's going to be bitterly amusing) will be forcibly held in Treasuries. And by then only the Elites will be able to actually sell any shares in return for money. Retirement accounts will be the new Roach Motels.
In short, the real economy will be so different from the official economy very few of us will have the stomach to pay any attention to the officially-pimped economy and it wouldn't matter much if we did. There aren't any lengths TPTB won't go to to keep up the charade. There may still be a few crumbs of wealth not yet transferred from the bottom 90% upward to the neo-Feudal lords and ladies, for them to distribute among their loyal retainers (who will make up the 91 - 99.8 percentiles).
"When "the retirement of the baby boomers is expected to severely cut U.S. stock values in the near future," is the ominous initial sentence from no lesser maintainer-of-the-status-quo than the San Francisco Fed's research department, one begins to recognize the Federal Reserve's overall need to hyper-inflate asset prices at whatever cost for fear of the 'wealth' destruction looming."
I believe this is the REAL underlying reason why leaders in both major political parties support large-scale immigration. The birth rate of Americans as a whole is relatively low. Corporations (who essentially own both major political parties) want more citizens so those citizens will CONSUME. So long as we have a two-party system with a stranglehold on the election process, I think there is essentially zero chance that we will ever see meaningful restrictions on immigration or deportations of any significant size. Corporations run the show... and the Fed is their friend.
I agree with most of what you say, especially the Corporations run the show part, but how much consuming are the "new citizens" going to do with minimun wage jobs and mostly working in the underground economy? These folks are fast learners if nothing else, they'll figure out the SS scams and all the free goodies pretty quick. That puts them jam up against the home boy FSA's and we all know the recipe for all this is certain turmoil all the way around.
The Corporate boy's call the shots, but that don't mean they know what they're doing, and anyway, they won't have to live amongst them.
Cheers, keep your powder dry.
I have no doubt the government, politicians and big business types are encouraging open borders and immingration in an attempt to dam up this financial retirement mess. What I do find rather dubious is if 100+ million Hispanics and another 50 million or so assorted Asians and Africans are going to willingly pay to support 150 million old gringo baby boomers.
Right now there is all kinds of voter sentiment for sticking the taxpayers with the retirement bill even if it means trash piling up in the street and closing libraries, parks and turning off traffic lights but when that changes due to demographics the current hopeful retireees are encouraging... Well... What then? 100 million public service employees are hoping to retire on fat pensions over the next five to ten years, of course they are all for Democrat open borders, but once the you let the wolves into the barnyard what then?
"...but how much consuming are the "new citizens" going to do with minimum wage jobs and mostly working in the underground economy?"
Some will work hard and rise up the socioeconomic ladder. Some will readily join the FSA. Either way, they will all consume. Some will consume as a reward of their labor. Others will be on the dole. Many government bureaucrats believe giving out EBT cards is stimulative to the economy, so they won't mind handing out more EBT cards. Either way, more people coming here results in more consumption.
Cheers.
oh gawd....I'M OLD!!!
So what is this, ZH clear out the slushpile time?
P/E will decline when rates go back up, and to just about that extent.
Unless there's a major sag in the economy, and projected sag over a long period.
Now, both of those together *could* cut P/E by half, but it has little to do with the age of the population.
You can't ignore interest rates. In Japan P/E s went up as interest rates on bonds went down as money printing moved forward.
Also heard BOJ was buying American stocks. It's a world wide central bank casino now, Joe Six pack buying of stocks is irrelevant. Only bankers count.
U.S. Stock Bubble update - Traders Are Betting On Stocks With Tons Of Borrowed Money:
http://investmentwatchblog.com/u-s-stock-bubble-update-traders-are-betti...
Wouldn't the healthcare sector boom under these conditions? If Hillaroid gets elected... Healthcare will go even more FULL RETARD than it has under Emperor BathHouse 'Boon Barry.... corrupt bankers will rejoice as well... BTW... ever get a whiff of her as she walks by? JUDAS!!!
Help me understand here, but if the p/e hits a decent ratio, shouldn't your average stock then have a chance at an attractive dividend yield? Would I finally be able to put my hard-earned money to work for income instead of having to rely on some greater fool to promise me capital appreciation? When p/e's are halved, I'm coming in.
Current 10-year PE ratio is 27. It went below 5 during the Great Depression. Even if you jumped in at 13, you should still be prepared to lose half your money.
Apparently headwinds make this market go up. Does that mean tailwinds would make it go down? Fuck no. When we have 10 people riding in the cart and only 1 person pulling it as far as the workforce goes, I expect the DOW to be about 50,000 and climbing.
Greed has no age limits.
Corruption becomes easier with experience.
Meh... long-term trend/headwind...
The market will get cut in half (or much more, imo) long before 2025.
Who writes this crap? Send them to a "learning to think" school... Absolute Garbage!!!
What was true in the past is not always true going forward. Given the rise of the fast traders and instutional holders the retail trade is smaller than in the past. Demographics in the market are different, may not be as much age driven trading.
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And this is news because?…
I looked up in about 1995 and asked the question, "what's gonna happen when the baby boomers retire in 20-25 years, to the stock market?"
None of the financial whizzards seemed to understand the question.
Sucks to be them.
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