Weekly Market Commentary 7-16-12

In a recent presentation by David Rosenberg I was reminded of something that was often talked about prior to the Great Recession, which is the upcoming retirement of the baby boomers.

Let me start by putting the Baby Boomer generation in context:

• At the beginning of 2011, 10,000 baby boomers will reach age 65 every day for the next 19 years according to the Pew Research Center
• Baby Boomers have earned $3.7 trillion, twice as much as the generation before it according to McKinsey & Company
• Baby Boomers control over 80% of personal financial assets according to Investors Insight
• Baby Boomers account for over 50% of total US consumption (70% of US GDP) and 80% of all leisure travel also according to Investors Insight

The Baby Boomer Generation has been able to remodel society as it passes through it simply because of its sheer size.

Below is a killer chart from David Rosenberg’s presentation:

What's fascinating about this chart is not the data itself. We all knew a retirement boom or labor shortage was fast approaching by 2007. We all read many books and articles on the investment implications or such a demographic shift. In fact, many were planning on high cost, low return vehicles to trap you in and then take advantage of you when capital was distributed back.

Then the Great Recession took place and we forgot about this massive demographic shift. As this “pig in the python” continues to pass through, it will continue to have strong implications on social policy, spending habits, and entitlements just to name a few.

Today, most surveys suggest that baby boomers are putting off retirement due to the amount of wealth that was destroyed during the 2008 Financial Crisis. In fact, I’m sure many of you reading this are feeling the same way.

Now it appears that we are at least on the other side of the Great Recession, I want to highlight a few of my long term thoughts on the investment capital of the Baby Boomers as they move out of the work force and into retirement over the next couple of decades.

1) More money will move into institutionally run vehicles, 401(K)'s, annuity contracts, insurance schemes and other blind pools. According to a study by Xia Chen at Sauder School of Business, in the 1950’s, institutions owned approximately 7% of US equities; in the 2000’s, ownership increased to 51%.

2) More money will drive toward income seeking investments, as people place a premium on safety and certainty, despite not keeping up with long term financial needs.

Between the housing meltdown, flash crash, banking scandals, and political ineptitude, investors have grown wary of core institutions that provided us with confidence. Who really trusts their banker or elected official right now?

3) Below, you can see how money continues to pour into bonds funds over the last few years. The more of a consensus around an asset class, like we have seen in bonds, the more likely something else will happen.

With this in mind, I’m not suggesting to sell all your bond funds. They are an important part of a well-diversified asset allocation and over concentrating in one asset class will likely lead to sub-par performance. Instead, we are focusing on tilting specific asset classes to take advantage of global macroeconomic trends.

Don’t let the Great Recession be the Great Distraction from the real shift in society that we all know is coming.

If you have questions or comments please let us know as we always appreciate your feedback. You can get in touch with us via Twitter, Facebook, or you can Email me directly.

Tim Phillips, CEO – Phillips & Company