Demographics: Adding Insult to Injury

The S&P500 inched up 0.8% last week yet the VIX or volatility index shot up over 12%.  This is not a signal confirming the recent move up in the S&P; instead it implies that traders are buying insurance to protect against a drop.

Economic data continued to show signs of strain.  Consumer confidence fell, when it was expected to rise.  The Case-Shiller home price index reported an annual drop of 17%; although better that yoy drops over the last six months, this is still market where home prices (as opposed to the number of units sold, which may be showing signs of bottoming) are nowhere near a bottom.  Durable goods orders also plunged 2.5% when there were expected to slip only 0.5%.  Initial jobless claims jumped to 584,000 almost back to the awful 600,000 range that dominated the first half of 2009.  Continuing claims fell to 6.2 million–again because benefits are expiring (a bad omen for the millions of long-term unemployed whose benefits are set to expire over the next five months), not because folks are returning to work.  Q209 GDP came in at -1.0% but the Q109 figure was lowered to -6.4% (from -5.5%).  And the five year U.S. Treasury auction–ominously–almost failed.

Technically, the daily charts are positive, but the long-term monthly charts are still in a bear market, primarily because of the carry through from the 2008 crash that shoved the long-term moving averages downward so forcefully.

BusinessWeek recently ran a cover story that  profiled the the change in the behavior of the baby boomer generation (those born between 1946 and 1964) as a result of the current recession.   It’s not a coincidence that the baby boomers’ peak earnings and spending occurred when America’s bubble economy went parabolic (1995 to 2005).  Since consumption represents 70% of the U.S. GDP, it makes sense to study the demographics of the baby boomers to get an insight into their impact on the economy going forward.

The results aren’t pretty.

As a backdrop, BusinessWeek reminds us that this group of 79 million people represents nearly a third of Americans.  But because they’re in their peak earnings period, they represented almost 50% of the national income during the bubble years.   Yet they contributed only 7% of the national savings and almost 70% are not financially prepared for retirement. 

The bottom line?  If you’re counting on the baby boomers to lead the economy out of the recession, you’re making a big mistake.  They’re about to start retiring and will need to SAVE, not spend, much more than they did during the bubble years just to prepare for retirement.

How about the next generation, Generation X, born between 1964 and 1980?  Here’s the simple but powerful demographic problem:  this group is about one-third SMALLER in size than the baby boomer group.  There will simply not be enough Generation Xers to replace the huge spending of the baby boomers.

Couple this shrinking demographic problem with the current and well known recession problems (baby boomers are losing incomes through job losses and are maxed out on their debt loads–mortgages, HELOCs, credit cards, auto loans, student loans, etc.–from the credit bubble) and you get a very powerful argument against any possibility of a consumer led recovery. 

It simply cannot happen.  It’s anybody’s guess when this reality will get reflected in the equity markets, but it’s highly likely the markets won’t take this news in stride, when if finally happens.

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