A Problem Of Accumulation

People complain about the Fed. Endlessly. Incessantly.

I get the feeling that we give the Fed too much credit.

The Fed simply controls one interest rate, the Federal funds interest rate, which isn’t all that important of an interest rate. It also does so incompetently.

It can print money and buy securities like it’s doing right now, and that makes stocks and bonds go up in the short term. But it doesn’t explain the last 30 years of behavior in the capital markets.

If you’re looking for an explanation for why the stock market is going parabolic, it’s not the Fed.

Ok, it’s not entirely the Fed.

It’s the Baby Boomers.

Baby Boomers are, as you know, a giant demographic bulge in the population. They’re responsible for the prosperity that we enjoy, and they’ll be responsible for the downturn that we won’t enjoy.

They’ve been working and enjoying high salaries and saving and investing for years. And for the last 10 years or so, they’ve been retiring and living off their retirement savings.

Sometime in the next few years, more of them will be retired (and dis-saving) than working (and saving). And we will experience capital starvation rather than capital surplus. Stocks should go down, and interest rates should go up.

Years ago, I bought Peter Zeihan’s The Accidental Superpower and never got around to reading it. Read it on a flight last week. His chapter about demographics is compelling.

To Zeihan, demographics (and geography) are destiny. I agree with that to a certain extent. But I will add that ideology is also destiny, though he would probably say that was a function of demographics and geography.

The Bad Good News

We will experience a shortage of capital for a number of years. The good news is there’s another large generation coming along to pick up the slack from Generation X: the Millennials. And there will be an echo of the previous boom. But times are going to be hard for Gen Xers like me in their peak earnings years.

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Disclaimer: The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One ...

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