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The Companion Advisor: General Interest
Boomernomics: How baby boomers' savings might boost financial assets

By William Sterling

Twenty-five years ago, Canadian baby boomers born in the late 1940s and early 1950s began trading their bell bottoms and love beads for business attire. They got jobs and bought cars. They got married and had children. Then they bought houses and furniture. And they borrowed...and borrowed...and borrowed.

Competing against each other, baby boomers pushed up the prices of cars, furniture, and other goods. That helped create double-digit inflation. Competing against each other, they pushed up the price of money. That helped create double-digit interest rates. Competing against each other, they pushed up the price of houses. That helped create a massive bull market in real estate which lasted until the late 1980s.

A bumper crop of grey hairs is now sprouting on those baby boomer heads. The most important lesson for investors is that interest rates may fall much lower over the course of this decade than most people imagine. That means the prices of other financial assets, like equities, can continue to rise substantially from the current levels already considered lofty.

In other words, baby boomers now appear to be doing to financial asset prices exactly what they did to real estate prices in the 1970s and 1980s. They may only be midway through this process and similar demographic forces are at work in many other major industrial economies.

As baby boomers age, they pass the point of buying houses and furniture en masse. Housing prices level off or decline, raising questions about the value of real estate as a store of wealth. As grey hairs multiply, baby boomers begin to think seriously about retirement and the need to have some sort of financial nest egg. That basically leaves stocks and bonds as the investment vehicle of choice. Competing against each other, baby boomers then drive stock and bond prices to stratospheric levels.

What makes us think we may be only midway through this process? In the 1950s and 1960s, people tended to keep 40 to 45 per cent of their wealth in the form of stocks and bonds, including their holdings through mutual funds. In the 1970s and early 1980s, holdings of stocks and bonds fell to around 20 per cent of total wealth as inflation pushed up real estate prices and devastated the relative value of financial assets. That coincided with the large-scale entry of baby boomers into the workforce, as shown by the sharp decline in the fraction of the workforce above 35 years of age.

In recent years, the gradual aging of the workforce has meant a return to financial assets as a means of holding wealth. Naturally, this has created buoyant financial markets and relatively stagnant real estate markets. As of early 1995, the share of households' wealth held in financial assets had recovered to around 30 per cent. But that was still a far cry from the 45 per cent level reached in the early 1960s. The share of older workers in the workforce is projected to grow sharply by the end of the decade. This trend should bring the share of older workers back to levels last seen in the late 1950s and early 1960s. Against that backdrop, it would not be surprising to see financial assets continue to gain favor at the expense of real estate, with the share of household wealth in financial assets perhaps returning to the 40 to 45 per cent range. If the decade-ending workforce share is correct, it suggests that baby boomers are only midway through the process of ramping up financial asset prices, just as they did earlier with real estate prices.

Among the numerous political and economic implications of this demographic story are two that have major investment implications: (1) As baby boomers continue to grow in political clout, they will have a strong vested interest in electing governments that keep inflation low and protect the value of their retirement nest eggs. (2) Likewise, they will have a strong vested interest in restraining government spending and taxes as they struggle to accumulate wealth for their retirement years.

Perhaps it is no coincidence that central banks around the world have succeeded in bringing inflation rates back to levels not seen since the late 1950s and early 1960s. Perhaps it is also no coincidence that governments around the world are under intense political pressure to trim spending and move toward balanced budgets.

Interest rates are probably not headed back to 1950s levels anytime soon. But investors should not underestimate the potential for interest rates to fall to shockingly low levels over the next few years as powerful demographic trends reinforce pressures for lower inflation and greater fiscal discipline by governments.

William Sterling, Chief Investment Officer of Trilogy Global Advisors, LLC a New York-based investment firm that manages global equity, balanced and income-oriented portfolios. The team of 18 investment professionals, led by Chief Investment Officer William Sterling and Portfolio Managers Robert Beckwitt and Greg Gigliotti, manages over $4.7 billion on behalf of CI Investments. Trilogy's unique investment process integrates top-down economic research and investment themes with bottomup fundamental analysis and risk analysis.management.

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