The New-Normal Class Warfare: Old Vs Young?

Tyler Durden's picture

While the most commonly held perspective on the aging demographic in the US is a retiring Boomer generation that is increasingly risk-averse (rotating to fixed income) and in desperate need of a growing segment of the healthcare pie, it appears that this may not be the entire picture. The data shows, via UBS Larry Hatheway, that in fact asset preferences do not change much by age cohort and therefore is not the driving reason behind a secular rotation out of stocks per se (as opposed to more simple reasons such as mistrust) and more notably the perception of an increased longevity could actually incentivize older investors to extend investment horizons (whether in stocks or fixed income). There does, however, remain a clear correlation (intuitive rather than causal if one is splitting hairs) between equity valuations (P/E ratios) and the older cohort (implying expectations of dropping equity valuations). Critically though, it appears from the data that older investors are not more risk averse. There is one further issue that is quietly emerging and that is US fertility data which points to an 'eventual' rejuvenation of US society - which could eventually shift the demographic influence back in the opposite direction. The simple take-away is that while old people continue to desperately cling to wealth preservation in their longer-than-expected lives, with their notably higher-than-average net worths, there will be an increasing pressure to stealthily tax part the aged of their wealth to cover the costs of a growing and even more state-dependent youth demographic that is emerging. Forget the 99% versus the 1%, it appears the new and more clearly-defined class warfare could well be the old versus the young.

 

There remains a clear correlation between the older cohort of the population and equity valuations (P/E ratios) suggesting a falling equity valuation regime is currently occurring...

 

"Income tends to be correlated with equity returns, so that in periods of high equity volatility the uncertainty of future income also increases. Taking this into account suggests that working investors should hedge their income volatility by shorting rather than buying equities."

But as opposed to conventional wisdom, it appears the older cohort is more more risk averse as they hold on to their investments on perceptions of increased life-expectancy dominating patterns perhaps...

 

But the fertility rate continues to rise - outpacing the older cohort even with its increased life-expectancy - putting inevitable pressure on the state to cover more-dependent younger cohorts over time...

 

and where to get that much-needed additional funding to cover the costs of the younger demographic? Well, the older cohort dominates net worth and seems the most obvious place to start...

 

As UBS summarizes, although much discussion of US demographics is drawn to the ageing of the baby boomers, that focus ignores another important fact about US population dynamics. Specifically, the US fertility rate (defined as the number of children per woman) has been rising steadily for three decades and is now above 2. That suggests that the conventional wisdom of an America growing ever older may not be right, at least at more distant horizons. The demographic hump of baby boomers will move into the tail of the age distribution and the distortion created by the post-war spike in fertility rates will fade. In short, demographic change, as important as it may be, could also prove to be transitory as longer-run factors determining population growth change.