Several years ago, Gluskin Sheff's superstar economist (previously at Merrill), David Rosenberg (in)famously flipped from bear to bull, predicting what amounts to a victory for the Fed: a jump in (wage) inflation, a burst in economic growth, and an overall selloff in that most deflation-dependent asset, the US Treasury. None of those happened, and while we (gently) mocked Rosie's transformation at the time, recently Rosenberg himself admitted that our skepticism was accurate, when he reverted to his bearish bias over the past year, predicting that deflation would end up winning after all.
Today, in his latest market musings chartpack, we present the key reasons why Rosenberg has never been more convinced that all those calling for an end to the secular bond bull market, are wrong and why despite the Fed's best intentions to create the impression that the global economy is stabilizing, what is about to be unleashed on the global economy is at least 5 years of accelerating deflationary pressures.
As the main catalysts for his gloomy outlook, Rosenberg lists the obvious ones, debt and deflation, but by far the most important factor that prompted Rosenberg to revert to the "dark side", the one about which Rosie says "nothing is more important than this if you are looking at what will fundamentally influence the financial markets for the next decade-plus"... is demographics.
"The first of the boomers turned 70 this past year, that 80 million proverbial pig-in-the-python in North America, and 1.5 million will be doing so each year for the next fifteen years."
That fact, Rosenberg believes, will be the single most important driver of returns over the next decade.
Below, he explains why those seeking to understand market moves and inflationary forces over the coming ten years, should first and foremost focus on demographics. Everything else will follow.
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as excerpted from Lower for Longer Lingers, by David Rosenberg, July 2017
We are back into the “lower for longer” theme — lower growth, lower inflation and lower bond yields. Each cycle, the peaks keep on going lower and lower. Just as Bank of Canada Governor Stephen Poloz warned everyone last September. To be sure, he just raised the overnight rate and likely does one or two more, but not likely more than that. And importantly, the interest rate that the markets determine, such as the 10-year and 30-year GoC bond yields, are both lower today than they were the day the BoC tightened policy. This is useful information on its own.
The “lower for longer” theme really is all about the economy in 3D — Debt, Deflation and Demographics.
We have written and commented on all these factors repeatedly, in terms of explaining why growth is stuck in the mud, why pricing power is so elusive, and the effects that the aging but not aged baby boomers are exerting on the economy, capital markets and politics as they have over the past six decades. This is where the power and wealth is concentrated, and the fact that this demographic bulge is moving into its 70s now along with the rising prospect that this group makes it past 85, is having and will continue to exert powerful influences over asset pricing, and specifically, the secular trend towards seeking income in the equity market given the lack of safe yield in the traditional government bond market.
David Foot was my professor and advisor during my time at the University of Toronto back in the early 1980s and has long been Canada’s demographic expert and had a profound influence on me then, as well as today.
He famously said that demographics explains two-thirds of everything, so it is with that in mind that I decided to publish this updated chart package. He could easily have not used a number, and merely said “demographics is destiny” as a loyal subscriber told me just the other day.
The first of the boomers turned 70 this past year, that 80 million proverbial pig-in-the-python in North America, and 1.5 million will be doing so each year for the next fifteen years. Nothing is more important than this if you are looking at what will fundamentally influence the financial markets for the next decade-plus. The law of large numbers makes this critical because we saw how the boomers, when in their 20s and 30s in the 1960s, 1970s and 1980s drove consumption growth and inflation. We crossed over that mountain already, and will continue to do so for years to come.
Those market pundits screaming that the secular bull market in bonds is over whenever, God forbid, there is a mild correction, will continue to be proven wrong as has already been the case for years. And similarly for those that say that the dividend yield/growth theme is old, tired and stale — in Canada, there has been just a 3% rise in the price of the TSX over the past decade and yet the total return in the stock market has been 40%. In other words, over time, the total return in the Canadian equity market has been one part price and nine parts reinvested dividend. A 2.8% yield on the TSX is nothing to sneeze at in today’s enduring low-rates environment — you can’t even get that at the very long end of the Spanish government bond curve! The boomers are being forced to work longer than they have before...
... as they redo their calculations of what a comfortable retirement lifestyle looks like given their level of savings — and the realization that they are going to be living a lot longer.
This has obvious implications for the financial markets because the drive for income from the securities they choose to own is going to be every bit as strong as the reason why they are opting to stay in the labor market well into their 70s — the escalating need for reliable and recurring cash flows.
There also are other considerations. While the wealth and power...
... whether in politics...
... or at the C-suite level in the private sector — resides in the baby boomer cohort...
... the peak in income and spending in society occurs in the 45-54 year category.
The fact of the matter is that this age groups’ share of the population will not bottom for at least another six years, while the share of the 65+ crowd will continue to rise inexorably.
So what to expect going forward is what has already been happening this cycle which is that aggregate growth in incomes and spending will be decelerating, and that will be posing additional deflationary pressures in the economy, and this in and of itself will ensure that bond yields remain extremely low.
This is a big challenge for a huge swath of the population moving into that oldest cohort where the desire for cash flows causes them to undergo the most profound asset mix shift since they were in their 30s but this time in the opposite direction — moving into the safe income of bonds and trimming equity exposure.
But today, that asset mix shift will look different because the government bond market no longer provides those adequate income flows…
... it is the equity market that has filled that role that the bond market has vacated in these ongoing deflationary times.
And CEO’s realize this demand from their investor base which is why the dividend story is no longer just confined to banks, utilities and pipelines. Every single TSX sector except for technology now delivers a yield that is better than you can garner at the belly of the GoC bond curve; a decade ago, no sector, not even utilities, could lay that claim.
Of course, there are other ways to play the new wave of boomers turning 70 from an investment standpoint beyond “lower for longer”. The ones that can retire will have one thing on their hands and it is time. And more of it too. So if it’s all about “follow the money”, as Deep Throat advised Woodward and Bernstein back in the early 70s, then it is “follow the boomers” today. Follow their spending patterns. As a share of their income, they spend much less on semi-durables like clothing (well, they don’t have to work) and durable goods and housing, but it is remarkable how much they spend on “experiences” now…leisure, hospitality, recreation, entertainment, restaurants, travel/tourism. As a share of income, those 65 and older actually dole out more on these services than the folks in the age groups behind them! Biotech and medical technologies are obvious aging demographic plays as well (cures for age-related macular degeneration is a massively growing field), but maybe investors should also be seeking out cruise lines that pay out a dividend too!
For more from Rosenberg on the "coming demographic crisis", watch the following clip: