Presenting The Demographic 'Risk-Aversion' Secular Rotation

Tyler Durden's picture

Much has been made of the lack of retail participation in the casino equity market rally of the last few months (and few years for that matter). Whether it is a signal of the individual investor's overly anxious nature and only the pros 'get it' or more likely this is the end of the baby-boomer-driven secular savings and investment bonanza is perhaps more likely as a nation of soon-to-be-retirees rotate from massive-drawdown-inducing stocks (no matter how diversified your group of trees, when the tornado hits the forest, they all fall down) to the relative (low-drawdown) safety (and steady income) of fixed income. Nowhere is this 'its different this time' secular shift more evident than in cumulative fund flows.


As Deutsche Bank notes though - in true empirical fashion, we noght add - When rates rise investors are faced with capital losses on their bond holdings. Therefore, it makes sense that bond funds have experienced outflows during every rates up-cycle as capital losses prompt investors to re-allocate out of fixed income. Equities are the main beneficiary of this re-allocation with strong inflows during every period of rising rates; since the 1990s, equity flows have been 60% correlated with the 10yr yield.


However, with debt loads as high as they are the Fed's printing mandate and banking reacharound, it is hard to see rates being allowed to rise in a meaningful enough manner to come close to the kind of pain investors have suffered in stocks over the past decade (and therefore drive the rotation back to scary stocks). Though caveat emptor as perhaps Japan is inching closer to the'moment' when central-bank-provided stability morphs into catastrophic instability as Minsky re-appears to remind the world of reality.

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Madcow's picture

Boomers are being forced to turn their equity investments into money - to buy food, service debts and pay taxes.  

Either all that "equity" holds up as money good - or it does not. 


donsluck's picture

Boomers, now in their 50's and over, have been bust for at least 20 years.

WillyGroper's picture

Not all of them no matter how much you wish it so.

Whoa Black Barry's picture

You got that wrong buddy. It's boomers' kids who are bust. The boomers are doing just fine. And if any boomers do go bust they'll look to their kids' generation to bail them.

Vlad Tepid's picture

The Boomers are moving their equities into the bond markets...half of them got wiped out when their money was in maturing stock (tech and building sector, including my pops), the rest moved theirs over to bonds for safety and returns but so many did at one time that the bond market is going to explode from the pressure...I think the only thing driving up bonds are Boomers former equity accounts moving over...this is part of what happened in Japan and why their bond market has been so robust for so long - retiree demand.  When people start cashing out, watch out below.

CPL's picture

Hence new bagholders must be created.




...what do you mean you haven't got 5K and a decent credit rating to open an account?  gtfo...

MiddletonRobert3's picture

my roomate's sister makes $85 hourly on the computer. She has been fired from work for 6 months but last month her paycheck was $16158 just working on the computer for a few hours. Read more here .....

Whoa Black Barry's picture

Your sister's room mate works her anus. So does your sister and your mom.

Cognitive Dissonance's picture

Ultimately even those who fled to the perceived safety of bonds are gonna get it in the end.....pun intended.

Amish Hacker's picture

I think you're right, CD, but a lot can happen between now and then.

Crowds move not to genuine safety, but to what they perceive as safety, and when the SHTF in Europe it may be that the herd will panic into USTs. I'm not saying it will happen, just that it could, which is part of what makes this market so tough to trade. Euro holders may rush for the dollar, maybe JGB holders, too---or maybe not. Maybe the whole system comes to Full Stop without any of these things happening. Or they do happen, but so quickly that they're only tradeable for insiders.

I dunno. The easiest thing might be just to keep stacking physical. I'm surprised no one else has thought of this.


Cognitive Dissonance's picture

I suspect you are correct, that the initial impulse(s) of the herd (when danger is sensed) will be to rush to the "perceived" safety of the USTs. The best of the worst will always stand the tallest......and eventually crash the loudest. Everyone is rushing to the short end of the curve thinking they will be able to get out before the crash comes.

Get out to where???????

It all reminds me of those stories and photos we saw of the aftermath of the Japanese tsunami. Those who thought they would find safety on the second or third floor, or up a tall tree, were often overwhelmed and swept away, often not by the water itself, but by the debris pushed along by the water which knocked so many from their perceived safe perch.

The same thing will happen to nearly everyone. When these massive (financial) storms are finally spent, very few will come through in one piece. Even we PM holders will be knocked about severely.

StychoKiller's picture

This morning while waiting for the dentist, I had to listen to BOTH the local news and CNBS tell me that the Economy is "recovering."

The thing is, Icebergs are around 90% below the surface, so even if you take note of it, it doesn't look so bad!  And the band played "Nearer My God to Thee!" -- 'nuff said.

mayhem_korner's picture



Looks like the equity markets will have to rely on levitation (and institutional algos programmed to trigger on keywords from supposedly "embargoed" press releases, ahem) until at least 2014.  But methinks the world will be a hair different by then...

CClarity's picture

There really hasn't been all that much delevering if all forms of consumer credit is 97% of August 2008 peak - - - and as the amount of public debt continues to expand and increase a lot, and we the public are one the hook for that along with "our" consumer credit debt  - - -  it begs the question of how that debt, personal and public, can possibly be adequately serviced into the future as the boomers cash in their investments to service debt and pay for consumption. Where will the additional "investment" into bonds and equities come from?  

I see implosion on almost all investment fronts (financial).

slewie the pi-rat's picture


Cdad's picture

Interesting question...about where money for stocks is going to come from.  The criminal syndicate known as Wall Street has chosen to imply, it would seem, that stocks have "hit a permanently high plateau" because...well, just because.  Eavesdropping on the BlowHorn [CNBC] just yesterday, I heard someone talking about the catalyst for stocks going higher is...that stocks are going higher.  Vapid.  I think we have run the gauntlet of ALL fake equity catalysts...and now money just continues to pour into bonds.

And as if to evidence the point, just a bit ago, I actually fell asleep at my desk...listening to Bernanke drone on about his great accomplishment of bailing out the banking system in 2008...the very system that continues to destroy all market credibility.  Way to go, Ben!

Well then, back to napping, I guess.

J 457's picture

"Interesting question...about where money for stocks is going to come from."

Its coming from the millions of people who have a 401k plans who twice a month donate more money because; 1) They don't have a choice but to invest in stocks if they want free company matching 2) Are so disconnected from market that they think stocks will always go up and earn a good long term return 3) Have been conditioned for the last 10-20 years that their 401k is a good sound retirement instrument.

However, I think as time progresses there will be more boomers retiring and selling their equities than new investors still working and willing to contribute new money to 401k's.  Then you have FED punishing these older savers who don't want in the market, but buying CD's or bonds or money markets will not provide adequate return to survive.  Raising rates will be a good first step but will probably cause the markets to fall.  



Cdad's picture

Nice boilerplate stuff.  Very typical status quo thinking.

First, if you are working part time at Jack in the Box, you don't have a 401k.  Second, just because you are making 401k contributions does not mean you are allocating to equities.  And third, I presumed we were talking about a flow of funds of to counter act the bond love affair.  I don't see it.

Equities have been divorced from the economy for a long time now, riding on corporate buy backs and cost controls.  You need an actual economy to move the needle...not HFT trickery.

But you go on thinking that the guy making your tacos is going to take you out at a better price, now that we are almost all the way back to pre economic crisis market highs...with only a fraction of the economy that we had last time we were here.

J 457's picture

Status quo?  You have a habit of focusing too much on the "fast food" economy and not enough on people working in other industries making decent wages.  To answer your question, that's where the new money keeps coming from.  Do you work?  Do you have a 401k?  Is the money invested?  That would be the status quo.... 

StychoKiller's picture

Has it occurred to either of you that corporations might be cooking the books to make earnings look good (and hence, supporting the levitating stawk market(s))?

Pairadimes's picture

I would actually feel better if 'casino' was a fair analogy for the equity markets. As it stands now, TPTB can put a fat finger on the roullette wheel at any time, and clear the table.

Who wants to play when the game is rigged, and the Fed is picking your pocket while you are shaking the dice?

Sudden Debt's picture

On a long enough timeline, we run out of old people..l

aztec two step's picture

Rather than the usual conspiracy stuff floated at this blog, this is one of the most intelligent post since the advent of this daily screed several years ago.

midtowng's picture

Many managed IRA and 401k's have the option of being automatically moved from equities to bonds after you turn 55. This, combined with the 2008 crash and the 2010 flash crash, is probably responsible for this shift.

Vlad Tepid's picture

Exactly.  This is why the Japanese domestic demand for bonds was so strong...but as soon as a critical mass of seniors need to start cashing in - avalanche time.

mess nonster's picture

Demographics... a word hated by the Elders for all the right reasons.

Dingleberry's picture

Here is the deal:

In order to avoid obvious deflation, Ben needs a bubble. RE is too hard to inflate with those pesky little qualifications for buyers. So that leaves bonds, commodities or stocks.

Ben has the entire bond market covered, either by his QEing or using primary dealers, he's gonna keep ZIRP. And adjusting for inflation, yields are well below negative.  So forget that.  Commodities and options are too complex for J6P (except for physical PMs), so forget that too.

Stocks are all that is left to blow.  Or more accurately, re-blow.  Granny, daddy, the dog, and everyone else that gets a 401k statement, needs to feel the love from Uncle Ben, and go out and burn a wad of cash and plow money back into the market. Expect to hear daily pronouncements from CNBS et al, about "buy stocks while they are cheap!" or "Apple to $5000" and other propaganda. There is no other way out.  Another bubble simply has to appear. This is the only one that I see. 


Corn1945's picture

I was thinking along these lines as well but bubbles usually have a psychological, get-rich-quick mentality component to them.

You don't really see that (yet?) with the stock market. People have been burned badly twice in the last decade. First the Nasdaq, then 2008.

StychoKiller's picture

Not only are bond yields really negative, but most of the Ignorati don't really understand how the bond market(s) work (I know I don't!), let alone the zero-sum games of commodities and forex.  I'll bet that most 401K holders just re-allocated to mostly bond funds because they did indeed get burned (again!) in the stawk market(s).

geewhiz190's picture

question:  while the equity outflows from mutual funds is very apparent, haven't these outflows been more than made up for by inflows into ETFs ? From this vantage point, the "public" simply seems to be moving from one form of equity exposure to another, and upping the ante.

unionbroker's picture

ETFS are volitile sophisticated trading vehicles i doubt people over 55 are going to move their retirement money into them

geewhiz190's picture

i see it every day. even 80 year olds want in. the" just  about to retire group" as well.  they're afraid they're going to outlive their savings and want something with income and some growth potential.

unionbroker's picture

know your client rules prevent brokers and advisors from putting 80 year old people into these vehicles . Doing so would easily be grounds for dismissal and or a lawsuit

geewhiz190's picture

nonsense. it's widespread and not really discouraged as long as the accounts are balanced with most of the money in fixed income.  SPY isn't considered a speculative investement in and of itself- 80 or not

unionbroker's picture

you just contradicted your first statement :)

geewhiz190's picture

no. i didn't, read it again. i said people seem to buying etfs instead of mutual funds, which they are selling.  and they're buying more in etfs than they are selling in m-funds. the etf that might cause legal issues would be GLD. why?  unsuitable and risky.  only "sophisticated" investors are clear to own it, regardless of their age

magpie's picture

What also could be interesting in this context are immigration numbers, which was/is meant to offset the demographic crunch. I have a hunch that those numbers will be next, after inflation indeces and balance sheets, uh to be "corrected" or "seasonally adjusted".  

unionbroker's picture

must be all those 80 year old that traded all that vxx today

q99x2's picture

Long Beach and the Feds. I woke 3 times last night and each dream was about the same thing. Weird - wish it would have been to buy the vix.

bigwavedave's picture

All your savings and pensions are belong to us!

Venerability's picture

Create a more stable and inclusive market, where House Sweeps are less cataclysmic and less frequent, and everybody will be very happy to come back in again.

The applicable model is the gambling casino.

A casino where nobody but the House can ever win, no matter how smart or skilled they are and no matter how hard they work, is not going to attract new customers, nor keep its current ones for very long.

There are many smart and skilled and sophisticated people willing to take risk in every age group and every demographic subgroup.

But no one will take risk without at least the possibility of sufficient reward.

The House has become far too greedy.

That's it, pure and simple.




StychoKiller's picture

MFGlobal is the real game changer, to those that are paying attention.  Even casinos don't change the rulez of the game when the dice are in the air!