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).