Demographics That Slammed Economy In 2008 Now Poised To Slam Stocks (Cont)

Waiting For Wave of Selling

During retirement people tend to lighten up on equities. Some get out of equities all together. What may be the trillion dollar question is when the first leg of the baby boom generation will sell the most stock. The chart below takes a stab at answering.




Currently the best correlation suggests that at age 67 they will sell. That's 67 or age 50 with a 17 year lead time. It further suggests the selling should have already started. The black line in the chart above is the S&P 500 adjusted for inflation. Looking at the market this way we appear to be in a secular bear market that started in 2000 with a series of lower tops and lower bottoms. The 2007 top was lower than 2000, and currently the real price is 2.3% below the 2007 top. The 2009 bottom was lower than the 2003 bottom.

Are we about to experience the largest share of the population to ever enter the peak age of selling stock? I can't get too excited about the chart indicating the selling should have started a couple of months ago. Two years ago the strongest correlation suggested the peak age of selling was 65 and a half. This bull market (or up leg in the secular bear as the case may be) has shifted the lead time for maximizing the correlation 18 months. If two years of rising markets can shift the lead time that much it casts some doubt on the meaning of the correlation. While I still expect a huge wave of selling from the baby boom generation, it may not come until something else breaks the upward momentum of stocks. Baby boomers may be willing to let it ride as long as they can.

On the other hand, the selling may have begun and we just don't see it because our measuring stick is shrinking. Priced in euros our market peaked back in May. Priced in pounds it peaked on August 1. On the Wednesday, the Fed announced no taper and stocks went up about 1%, the trade weighted dollar index fell 1%. So, there was no gain for non dollar observers.

After years of being told we were the "cleanest dirty shirt in the laundry hamper" foreign stock markets have outperformed the U.S. market the last few months and from a non dollar perspective it looks like our market could have topped and be headed down. Even so, the big wave of selling I have been expecting the last year and a half has not started, yet. We are still dancing on the edge of a value cliff.

Value Cliff
In the last 20 years stock valuations according to the PEses that I use are about twice as high as they averaged in the 120 years prior to that. This article has more info on the PEses. Currently, the PEses is just above the average of the last 20 years. So if the last 20 years are the new normal we are near normal and there is little to worry about.



What if the last 20 years were an aberration that is about to end? As I see it the last 20 years were largely a demographic phenomenon. The birth dearth of the Great Depression went through the peak years of selling stocks while the baby boom generation went through the peak years of buying and holding stock. So an unusually small group of sellers combined with the biggest ever group of buyers pushed prices and valuations to unheard of levels.

The Depression babies are long past the age of selling stock. The tail end of the baby boom is still buying stock, but they are being displaced by the birth dearth of the 1970s. So the number of people reaching the peak age of buying stock has been in decline for several years and will continue declining for several more. The baby boom while buying less stock remains in the age of holding it. Perhaps the only thing holding valuations at twice the normal level is that baby boomers have not reached the period of selling.

One Catalyst Away
Anything that spooks 67-year olds could tip off the biggest selling spree in history. We are perhaps one catalyst away from starting the third and most destructive down leg of the secular bear market. The catalyst might be a government shutdown, a weak jobs number, a stock price rally that falls short of a new high or dozens of other events. I expect the next leg of the bear market to take the PEses down to the 11 it hit in 1982, or perhaps even the 7 it hit in 1932. Once we hit a low valuation like an 11 or especially a 7 the market will be in position to start a real secular bull market like ones that started in 1920, 1949 and 1982.

For now, the economy faces a demographic headwind that means it is weaker than many indicators like initial claims suggest. The stock market (SPY) faces a demographic cliff.

Link -
http://seekingalpha.com/article/1714962-demographics-that-slammed-economy-in-200...
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We should bear in mind that Demographics is but one of the major factors now driving Global Economics and there are also other factors influencing events.

So, whilst I concur that Demographics are certainly the major player, there are also other factors, which are muddying the Economic waters and the overall effects are making the timing of events "somewhat" difficult to gauge. 

The Nellies may well be getting Nervous, But the fat lady is not yet about to sing!
http://www.investing.com/indices/major-indices

Technically, the $16.699 trillion debt ceiling was hit on 19 May. The US Treasury has been using extraordinary measures to keep going. If Congress doesn't raise the so-called "debt ceiling", then the Treasury estimates that it can only stretch out the money until 17 October. At which point, it could run out of money to pay the interest on US government debt, and the US defaults in a technical sense if it misses an interest payment.
http://www.bbc.co.uk/news/business-24329706
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Both sides of US Politics are playing games!

SHUT IT DOWN: White House orders Government to close

A government shutdown: What could it look like?

In remarks Monday, President Barack Obama said children, seniors, and women would be "hamstrung" if the government were to shut down.

"The shutdown will have a very real impact on real people right away," he said.

What happens next?

President Obama has addressed the military to tell them he will work to reopen the government as soon as possible.
In a three-minute video in which there was no mention of Republicans, Obama said Congress has not fulfilled its repsonsiblity.

"It has failed to pass a budget and, as a result, much of our government must now shut down until Congress funds it again," he said.
House Speaker John Boehner, R-Ohio, responded: "The American people don't want a shutdown and neither do I," he said. Yet, he added, the new health care law "is having a devastating impact. ... Something has to be done."


Read more:

http://www.news.com.au/business/markets/what-happens-if-the-us-government-shuts-...


Is it a stunt?

I suppose the impact will depend on the length of time it's shut down for.

World is waking, after weekend slumber!

Asian markets were generally down today, around 1%, except China which rose slightly.
European markets are now down, generally about 1%.
http://www.investing.com/indices/major-indices

US Futures are currently off about 130 points, which is just under 1%.
http://www.investing.com/indices/us-30-futures-advanced-chart

At the moment, the longer the "game of chicken" goes for, in the US, the more possible it is for those facing off to make errors of judgement and some of the results of these mis-judgements, could prove to be very unsettling to the markets! 

perceptions_now wrote on Oct 7^th, 2013 at 10:53am:

pn,


I fully expect that 'Mother Nature' will solve the over population problem over the coming decades.

Have you ever seen or experienced a mouse plague?   The mouse population in an area explodes,  and they number in the millions if not billions,  and then all of a sudden they all die.  Not from lack of food or water either, just a mass die off.

I expect that something like a pandemic of Bird Flu or somesuch will be the way most of us go in that scenario.  The 747 will ensure it spreads around the world at 900 KMH.   The last pandemic cost an 'estimated' 55 million people,  and that was before the 747.

JMO


OC

Old Codger wrote on Oct 9^th, 2013 at 5:04am:

I would suggest a mixture of "Mother Nature" & Human stupidity!

Your comment raises an issue, which was one of 6 major events that I wrote about back in early 2006, which I thought would/could have major possible Future Impacts, those being -

FUTURE WINDOWS

Possible Major Influencing Events, include:

1)      

END OF CURRENT STANDARD BUSINESS CYCLE

Event Initiator
- Usual cycle transition

Event Start Date
- Late 2006 to end 2007

Event Outcome/s
- Normally, low, if well managed.

Event Duration
- 12 to 24 months

Event Probabilities
-      Within 18 months, 100 to 0.
-      Worst Case Scenario, 20-80.


2) 

TERROR

Event Initiator
- Biological, Nuclear attack on Major Financial/Population centre, particularly in USA or major attack on Saudi Oil reserves/refineries.

Event Start Date
- Now to 10 years time?

Event Outcome/s
-      Medium to Significant, depending on the nature of the event.
-      Significant to devastating, if major damage to Saudi oil reserves/refineries or closing down of the USA financial system for an extended period.
 
Event Duration
- 1 to 20 years, depending on the nature of the event.

Event Probabilities
-      Within next 5 years, 80-20.
-      Worse Case Scenario, 50-50. 


3) 

INTERNATIONAL PANDEMIC

Event Initiator
- Major outbreak of Bird flu variant, spread as normal flu, by air.

Event Start Date
No way of knowing, but Murphy’s law may well be a guide.

Event Outcome/s
- Borders close, international trade and Tourism cease, the results would include countless 
  millions dead and an economic depression.

Event Duration
- 20 to 30years.

Event Probabilities
-      Within next 20 years, 30-70.
-      If event happens, Worst Case Scenario, 60-40.


4)

PEAK OIL

Event Initiator
- First reports that production can not keep pace with consumption, due to insufficient reserves.

Event Start Date
- Within 5 years.

Event Outcome/s
- Significant, to rampant increase in Oil related product pricing.
- Significantly increase inflationary pressure.
- Significant problems, in replacing Oil base, in many product lines.
- Immediate, knee-jerk reaction to implement Nuclear power.
- Increased, subsequent push for Green alternatives.

Event Duration
- 20 to 30 years

Event Probabilities
- Within 5 years, 80 to 20.
- Worse Case Scenario, 60-40.


5) 

BABY BOOMER RETIREMENT

Event Initiator
- Commencement of post WW2 babies going into retirement.

Event Start Date
- Already commenced recently – 2005.

Event Outcome/s- Significant reduction in Workforce Participation is likely, notwithstanding government efforts to delay.
- Immigrant intake dilemma likely, some will want a greater intake, to offset bottlenecks in some workforce sectors, whilst others will seek lower intake, to offset rising unemployment.
- Significant cost factor increases will enter the economy, due to population aging and lower Participation Rate, causing inflationary & deflationary pressures to grow.
- Significant reduction in Property values is likely, as event shifts thru to retirement and to the death of Baby Boomer generation. The generation birth rates that followed the Boomers reduced to 60%, then 40% in more recent times. As the asset rich Baby Boomers die, those left will be less well off and there will be less of them – the laws of supply & demand will take over.
- Significant reduction in Share Market values is likely and an extended depression, commencing around 2010, give or take a couple of years.

Event Duration
- 20 to 30 years.

Event Probabilities
- Start 100% - Has been guaranteed for over fifty years.
-Worst case scenario, 60-40


6) 

CLIMATE CHANGE

Event Initiator- Most likely Carbon overload of atmosphere from vehicles, power plants and the like.

Event Start Date - Already started.

Event Outcome/s
- Increase in severe weather events, such as Hurricanes, Floods, Droughts.
- Increase in sea levels worldwide, causing mass evacuations of coastal populations and deaths.
- Shutdown of ocean currents circulation between polar caps and equator, due increase    
in fresh water, arising from melting of large sections of polar ice shelfs. Possible result is new
ice age.
- Unless action is Worldwide and immediate (which does not seem likely), then the most   
probable outcomes appear bleak.
- If concerted action not taken immediately, this could be an end game scenario, the results
could include a Billions plus dead, an economic depression, much worse than the Great Depression
and major wars.

Event Duration
- How long is a piece of string?

Event Probabilities
- Start 100%.
- Worse case scenario, 65-35.

Janet Yellen as the new US Fed chief not just good economic news

Even as the world’s most powerful economy is held to ransom by the incomprehensible bickering of puffed up, petty-minded congressional politicians, President Barack Obama is able to create a moment of light with the near universally acclaimed nomination of Janet Yellen as the next chairman of the US Federal Reserve.

Yellen is vice-chairman of the Federal Reserve and deputy to the current chairman Ben Bernanke, who was appointed in 2006.

So let there be no doubt that her appointment to succeed Bernanke is well founded. Credentials aside, the appointment – or nomination, until it is confirmed by the Senate – represents a welcome first: the first woman to serve as chairman of the Federal Reserve in its 100-year history.

Obama’s nomination of Janet Yellen has international consequences because she will become the world’s most powerful central banker, but it will hopefully resonate in Australia for different reasons.

Link -
http://www.brw.com.au/p/leadership/appointment_economic_janet_yellen_AabOx2F2QMM...
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On the strength of the Yellen nomination today, the US DOW Futures market is currently up 83.
http://www.investing.com/indices/us-30-futures-advanced-chart

Good luck Janet, your going to need all the luck this & a bit more!