The Baby Boomers' Gift to the 21st Century: Recession

Sha, la, la, la live for today…

Don’t worry about tomorrow, hey, hey, hey…

An actual song lyric,

Written by Grassroots

Theme song of the Baby Boomers?

“Savings seen as threat to the economy,” warns a headline from the Chicago Tribune.

Can anything be done to stop this menace?

Of course, much is being done. Mr. Greenspan and his band of merry central bankers are doing all they can. The fed funds rate has been cut more aggressively than at any time in history. Likewise, the money supply is growing at the fastest rate since the late ’70s.

In short, our central bankers are mounting an effort to debauch the currency worthy of a gigolo in a finishing school.

Dallas Fed governor, Robert McTeer, adds comic rhetoric: “Go out and buy an SUV,” he urges consumers. Spending yourself deeper into debt is an act of ‘patriotism’, he says.

Yet, virtue sometimes triumphs – even if by accident or lack of opportunity more often than by force of will.

“Sated, Will Consumers Hurt the Economy,” asks the Wall Street Journal. The Journal article worries not that consumers have lost their will, nor their ability…but they may have lost interest. Businesses invested too much in IT and other capital improvements in the late 90s. The business sector is now “teched up.” Consumers went on a buying spree too – loading up on new cars, houses, and other big-ticket durables. Could consumers be ‘durabled up’ too, wonders the Journal.

But the threat doesn’t stop there. A bigger risk is that baby boomers will discover savings as they once discovered sex, drugs and rock & roll. They may even come to like the idea…and think they invented it. And perhaps they will even do it, like everything else they do, to excess.

The vanguard of the boomers are now 56 years old. Behind them trail 80 million Americans, few of whom have taken the challenge of retirement planning very seriously. As I reported in this space a few days ago, 80% of the population has no more than 8 months’ worth of financial reserves.

“50-Plus Population Not Prepared for Retirement” says an AARP Report. And the number of those not prepared for retirement is swelling faster than their lower extremities. In 2000, about 76 million Americans – or 28% – were older than 50. By 2020, there will be 40 million more in that group, amounting to 36% of the population.

Well, well, well…

You will recall, dear reader, that one of the sustaining rumors of the boom on Wall Street was that these millions of baby boomers were pouring billions of dollars into 401ks and other stock market investment programs in anticipation of retirement.

This gush of money was supposed to carry the Dow to 35,000 in what Harry Dent called “the greatest boom in history.”

Yet, nearly half of the baby boomers never bought any stock and never will. And even those that do buy stocks may not continue to do so forever.

Why not? Because they are getting a lesson in how the stock market really works. Stocks tend to go up more often than they go down. But then, they compensate for this upward bias by dropping suddenly and sharply – or going nowhere for years.

Arguably, an investor who still wears his baseball cap backwards can wait out the down cycles. Over the very long run, he can say to himself, I’ll come out ahead.

But an investor approaching retirement looks at his finances with a greater sense of alarm. He is often willing to forgo the incremental gains from stocks in favor of the surer returns from bonds…or mortgage lending…or rents.

Could it be that Harry Dent, whom calls a “human crystal ball,” has gotten the story completely backwards? Might not Dent’s vision of the ‘greatest boom in history’ be shattered by the very boomers he expects to create it?

Wouldn’t that be just like Mr. Market, dear reader?

Dent predicts that stocks will fall in the near term – to about 7,000 on the Dow. But after this happens, stock prices are supposed to shoot back up wildly.

Mr. Market will decide for himself what to do, of course. But I will give him a suggestion:

Confirm the first part of Dent’s forecast…but not the second.

After the Dow has lost 35% of its value…and the Nasdaq 60%…will baby boomers continue spending at the same rate and rush back into the stocks that have just burned them? Or, approaching retirement and stocked up on durables, will they do what consumers in similar circumstances have always done: cut back on spending…and place the savings elsewhere?

Even a little bit of forbearance could have a dramatic effect. John H. Makin of the American Enterprise Institute calculates that when you include capital gains as savings, Americans ‘saved’ about 15% of their incomes during the 1990s.

People are not idiots, not even baby boomers. They know they need to set money aside for the future. So, when capital gains disappear, they have to compensate somehow. For a while, of course, they can tell themselves that the market will come back…and the capital gains will return. And, maybe the market cooperates – for a while. But, sooner or later, somehow or other, stock values have to work their way back to the mean. After a long period of superior gains, there must be a period of inferior ones.

When the baby boomers recognize that they face a stretch of time without capital gains from stocks – or even losses – they will decide to increase savings in other ways.

Making figures that if they save at only one third the prevailing real rate for the 1990s – that is, at 5% – they would have to forego $350 billion of spending each year. This would subtract 3.5% from the GDP – effectively guaranteeing recession for many years to come.

Dr. Richebacher has done the math too. He found that if the savings rate were to revert to only 3% to 4% of disposable income – less than half the postwar average – it would make for “the deepest and longest recession since WWII.”

Your reporter, just saying…

Bill Bonner
Paris, France
June 12, 2001

*** “McVeigh no longer has the power to hurt, by word or deed,” Oklahoma’s governor reassured the nation. The International Herald Tribune reports that the McVeigh was fed two pints of chocolate chip ice cream. Then, just to make sure he was dead, they injected him with some even more lethal ingredient.

*** McVeigh, I don’t have to remind you, was ice creamed in retribution for his role in killing innocent women and children. His big mistake was his target. If he had chosen better he could be a U.S. Senator or maybe head of the Justice Department. Best not to think about it.

*** But wait…our we’ve strayed off our beat… Let’s see Eric, what’s going on in the land of investments, economics, and filthy lucre?

Eric reports from Wall Street:

Tech stocks, once again, showed the way down as the Nasdaq lost another 2%, to 2,170. The Dow dropped 55 points to 10,922.

Even an incorrigible optimist like Mr. Market can’t see the glass as half-full every day. Occasionally, he notices the space between the rim and the liquid and gets depressed…like an alcoholic working on his last drink after the liquor stores have closed.

Yesterday, his attitude turned downright despondent after Merrill Lynch issued some negative comments about contract-manufacturer companies like Celestica and Solectron.

These manufacturers of various electronics for companies like Motorola and Cisco aren’t making quite as many widgets as they used to. Yet, even though business conditions are worsening, many stocks in the group have rallied almost 70% from their early April lows. That adds up to a “Neutral” in Merrill Lynch’s book. The rest of us might call it a “Sell.”

Up north, Canada’s once high-flying Nortel Networks fell to a fresh 52-week low, dragging the Canadian stock market down with it.

While technology stocks stumble and bumble along, resource-related stocks continue their winning ways. Most oil-related stocks ended the day in the plus column. “The Dow Jones Coal Index is up an amazing 279% from one year ago,” observes John Myers, editor of Outstanding Investments. John thinks the boom times are only beginning for the U.S. coal industry. “U.S. coal producers saw exports surge by a whopping 37% last year compared to 1999. An energy-hungry world seems to have a craving for U.S. coal – a trend that will boost profits at coal companies and put dollars into the pockets of smart resource investors.”

In May, Taiwan’s global trade plunged 26%. Orders for U.S. technology goods like computers and semi-conductors have collapsed 40% since last year, the ISI group reports.

“Taiwan’s economy is on its sickbed,” Credit Lyonais Securities Asia (CLSA) surmises, “and it doesn’t seem to have a doctor either.” CLSA notes that the current unemployment rate stands at a record high and first-quarter GDP growth was the lowest in Asia. “The final piece of evidence: low hotel occupancy rates and half empty bars even while Taiwan’s mammoth Computex’s trade show was in town.”

Things aren’t any better in Japan, either. Japan’s economic output fell 2% in the first quarter – despite more than 5 years of easy money policies. Funny isn’t it… the way people have no confidence in Japan’s central bankers and almost unlimited confidence in their American counterparts?

Yet, amid the global economic slowdown, the two most populous countries on earth are oases of economic growth. Economically speaking, China and India are doing quite nicely, thank you.

Friedburg’s Commodity & Currency Comments observes, “China’s economic strategy has made it, for the most part, impervious to the regional and global slide in economic activity…China should finish 2001 with another 8%-plus growth rate.”

The Indian economy continues to sail (mostly unscathed) through the global economic tempest. While perhaps not as stalwart as China’s economy, India’s real GDP growth will likely exceed 6% this year.

The nation of one billion people now claims 3.7 million cell-phone subscribers – an 89% increase from the year before. Only 996.3 million to go.

Alan Greenspan is a “one trick pony” according to DR Blue team member David Tice In a recent interview with Welling@Weeden, Tice notes that whenever he’s facing adversity, Greenspan’s consistent tactic has been simply to create more credit and thereby entice consumers to spend beyond their means. “The point is,” says Tice, “the consumer has to keep borrowing in order to keep the boom going.”

Tice argues that the Fed’s easy-credit tactics promote excessive borrowing in the corporate sector as well. “We’ve taken the debt-to-equity ratio on the S&P 500 from 84% to 116% over the last 15 years.” In the process, says Tice, “We misallocated capital. Instead of building power plants in California, we built more bandwidth than we need…”

*** As you may have noticed, Eric does the heavy lifting for the Daily Reckoning. I do the kibitzing. Last night, I had dinner with a few French friends, one of whom travels frequently to America. “The big difference,” he commented, “is that in America people do jobs they are not trained to do. So, you get terrible service, sometimes, from barely qualified people. But the advantage is that you have people who will try almost anything.”

*** “If a ‘well-diversified’ investor was burned in U.S. stocks recently, chances are it was primarily due to one or more of these ten culprits,” writes C.A. Green, of the Oxford Club “Microsoft, Cisco, Intel, Dell, JDS Uniphase, Oracle, Ericsson, Nokia, Nortel Networks and AT&T. Together they make up three quarters of the drop in the S&P 500 over the past year.”

*** How to do better? Green: “Look at what sectors have been out of favor recently and are likely to ride the cycle all the way back to the top again. To my mind, that means favoring value stocks over growth stocks, small and mid-caps over large caps, and international markets over Nasdaq.”

*** Maria’s career in show biz seems to be taking off….slowly. She had her first paying modeling gig the past weekend. She’ll be featured in a French teen magazine, I believe. And she may be offered a part in a real movie – to be filmed in October. If she gets the part, she’ll have to be on location in Marseille for two months – with a tutor and a chaperone. Any DR reader want to spend two months with a beautiful 15-year-old in the South of France? No, on second thought, I’ll do it myself.