-- Posted Friday, 20 July 2007 | Digg This Article
By: George J. Cocalis July 10, 2007
So, the headlines actually had the word “ China ” splashed across all the news media outlets:
. ● “ China 's Economy Expands a Torrid 11.1% Clip in First Quarter”
. ● “ Wall Street Slammed after China Stock Woes ”
. ● “ Dow Average falls 416 Points after China Sell -Off”
. ● “ China Volatility Sparks U.S. Selloff”
. ● “ China to invest its Currency Reserves”
This is somewhat of a wakeup call to the American public on how globalization has affected their portfolios, whether positive or negative. It seems strange that the U.S. markets are following other markets and not the other way around and maybe, just maybe, that the United States has become the tenant and not the landlord!
It is interesting to note the difference of opinions and attitudes in the last few months from family, friends and customers toward the phenomenal growth of other nations and at the same time the economic weakness of the U.S. - not that this is enlightening news to the seasoned investor, but to the average American it surely is! It is one thing to listen to a gold bug futures broker sounding off the warning bells, but to see and hear these auspicious headlines in the NY Times or on CNBC is another thing. It is also interesting to note that the same doubters, condesenders, and people accusing some of us as “doom and gloomers” are not necessarily running out to buy gold, but their silence is screaming to me that they suspect or know that the U.S. has seen the pinnacle of its empire.
Every day the media reports of the weak dollar and the threat of inflation. My guess is that the average American will not make any consumer spending adjustments until they actually see gas over $4.25 per gallon and watch it stay there for about a year. If we factor in higher food prices at the grocery store and restaurants due to the increase in corn prices (ethanol vs. feed) and throw in credit card debt at record levels and banks tightening the mortgage application process, and all of this happening at the same time, then you will have the full attention of the American consumer!
There is one consumer group in particular that could tip the economy into a full blown recession and that group is the Baby Boomers. The question is, do the Baby Boomers who make up one of the most prosperous generations in U.S. history continue their over spending rampage even in retirement or do they get squeezed by higher inflation, low savings, explosive healthcare costs and the responsibility of taking care of their longer-living parents?
The Baby Boomers are probably the key to consumer spending more now than ever because of their sheer numbers (some 75 million), the first wave of which will start retiring in 2008.
Over the past 20 years, the retirement prospects of the baby-boom generation (people born from 1946 to 1964) have become a source of public concern. According to the Congressional Budget Office (CBO), some economic experts are increasingly worried that low savings by Boomers could limit economic growth, limit growth of investment, productivity, and wages (which drive federal revenues). Another concern is that the population of retirees is growing much more quickly than the taxpayer workforce. In 2000 there were 4.8 people of ages 20 to 64 for each person age 65 or older, and that number is expected to decline to around 2.9 by 2030. According to Fed Chairman Bernake “… this will pose enormous challenges to our economy as a whole because with fewer workers we need to have more capital, more savings, and more preparation for the economy to be able to absorb a large number of retired workers. With the increasing number of boomers becoming eligible for Social Security and Medicare and with the slowdown of economic activity there will be enormous budgetary pressures that will face the federal government which probably will result in lower benefits.” [1] This will not necessarily sit well with the largest voting group in America!
Figure 1.
Life Expectancy of 65-Year-Olds
Source: Congressional Budget Office based on Social Security Administration, The 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (March 17, 2003), p. 86, available at www.ssa.gov/OACT/TR/TR03/tr03.pdf .
Figure 2.
Ratio of Population Ages 20 to 64 to Population Ages 65 and Over
Source: Congressional Budget Office based on Social Security Administration, The 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (March 17, 2003), p. 82, available at www.ssa.gov/OACT/TR/TR03/tr03.pdf . (The values shown here are the inverses of the dependency ratios given in that report.)
It is interesting to note that besides a severe lack of saving there is another major issue confronting the Boomers that will leave them with fewer options in their old age and will result in a reduction in spending. According to William Frey, a demographer at the Brookings Institution, the Boomers have fewer children and are less likely to be married. Frey goes on to state that higher rates of divorce and separation could result in greater financial hardships for aging Baby Boomers. In 1980, about two-thirds of Americans age 55 to 64 lived in married-couple households. That percentage fell to less than 58 percent in 2005. [2]
Historically, unmarried people tend not to live as long as married people and so require less retirement wealth. However, they also tend to have higher living expenses and are more likely to be poor. If those historical patterns continue to hold true, an increasing share of the future elderly may find their finances adversely affected by the trends in marital status. [3]
Many Baby Boomers are likely to depend on government entitlements being there for them when they retire and their spending habits and savings patterns are influenced by their expectations on future benefits under current law. But they might have to change their way of saving and spending now that they are starting to recognize the looming difficulties in funding those programs.
It has been said that the Boomers are like locusts who are about to place a huge burden on the rest of us by demanding more special treatment in their old age, more so than in their prime earning years. The question then is how this will affect personal spending in the very near future.
By the way, I'm single and I was born in 1963.
[1] Federal Reserve Chairman Ben S. Bernanke Testimony before the House Budget Committee, Wednesday, February 14, 2007 and Thursday, February 15, 2007.
[2] “Study: Baby Boomers Expected to Work Longer,” by Stephen Ohlemacher, Associated Press, June 12, 2007.
[3] “The U.S. Retirement System and the Baby Boom Generation.” Congressional Budget Office, November 2003, p.7.
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George J. Cocalis
gcocalis@BrewerInvestmentGroup.com
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-- Posted Friday, 20 July 2007 | Digg This Article
