According to many, the state of the US economy is good. In fact, we’re likely to see an increasing Fed funds rate over the coming months as the Federal Reserve looks to contain potential inflation. But despite that optimism, I see a number of factors that have the potential to negatively impact the US economy over the coming years and as such, I see limited investment opportunities for those with excess cash to put to work.
In today’s Wall Street Journal, there is an article referencing Apartment List data that recent college graduates with no college debt, will need to work for 5 years before they can afford the down payment on a house. Graduates with student loan debt will require 10 years of work before they can afford the down payment. And those without a college degree will require 15 years.
That’s pretty depressing. And the long-term consequences could be very damaging to the US economy.
My Money Blog recently wrote here about the 10 year outlook for different investment classes providing another pessimistic view on longer term investment performance.
Over the past few months, I have been looking at where to invest. I am currently holding a fair amount of excess cash and rather than continue to invest in my diversified ETF portfolio, I am considering other options. Unfortunately, I see limited investment opportunities and haven’t found anything with strong prospects. In fact, it seems just the opposite. I am pessimistic of the markets due to a number of external factors most of which are driven by changing US age demographics and the financial challenges facing the full spectrum of age groups from Millennials to Gen Xers to Baby Boomers.
The Good Old Days are Gone
It used to be that the way things worked was you went to school, graduated and started working, bought a house, had kids, and retired at 60.
The model worked fine because of two factors – (1) you were almost guaranteed employment for life with the same employer and (2) when you did retire, you received a generous pension that paid for your retirement years.
But now there are problems with that model. Nobody stays with the same company anymore. In fact, the average tenure is less than 3 years, There is no employer loyalty and no employee loyalty any more. Workers and employers do what is in their own best interests which means laying off employees when times are bad and jumping to a new company for more money when employees have the opportunity.
Also, the Baby Boomer generation is reaching retirement age (the oldest Boomers are now 70 and the youngest are in their early 50’s. Some have pensions, but the vast majority do not. As such, they are relying on their own savings and social security to fund their retirement. Many have a standard of living well above the annual social security payment and have very little saved. And even if they have saved, the prospect of living well into their 80’s and needing 20 or 30 years of living expenses is a concern.
So that means, Baby Boomers will continue working into their late 60’s and even into their 70’s.
Where The Impact Will Be Felt
This movement away from lifetime employment coupled with the demise of pensions will impact the US economy in three primary areas:
Employment. It’s already quite clear that the employment market has changed. The impact of this extended working life is that there are fewer higher level positions available for the next generation – X. The challenge faced by Generation X is that they have already spent 20 years in the corporate world. They have climbed the ladder only to find their careers stalled as there are fewer upper level executive positions available. The Baby Boomers are still sitting in those positions and they’re not ready to give them up yet.
The same problem exists for the Millennial generation, but it’s even more magnified. Not only do they have Baby Boomers sitting at the top of the corporate ladder, they have a bunch of Gen Xers in front of them as well. Their prospects of climbing the ladder and reaching even midway are not good.
So rather than fight this trend, as a generation, Millennials have embraced the shared economy much more so than any other generation before. Whether it’s the growth in freelance workers (IT, finance, temp staff), shared assets (bikes, cars, houses), and even how businesses and ideas are crowdsourced, the shared economy is pushing the world in a new way. This is even apparent in the current US Presidential elections. How else could a 77 year-old self-proclaimed socialist from Vermont with no money make such an improbable run for the White House?
Housing Market. Based on the above statistics, it is going to take Millennials 10 or 15 years to save up enough money to buy a house. So Millennials are looking at being 35 or 40 before they can afford to buy a starter home. Why bother? Most Millennials envision retiring before the age of 40 anyway. And with so many freelance opportunities available in the shared economy, it’s quite possible to “retire” early.
Now we have another problem. Baby Boomers and Gen Xers have sunk a large percentage of their net worth into their homes. They are anticipating selling those homes at some point in the future and using the proceeds to fund their retirement. But if Millennials aren’t buying houses from Gen Xers, then Gen Xers aren’t buying houses from Baby Boomers, and they will have difficulty monetizing their home equity.
And even if this may be somewhat extreme, there will be negative price pressure on home prices over the next 20 years as more Baby Boomers reach retirement and start looking to sell their homes rather than buy new ones.
Equities Market. I expect that we will see the same negative price pressure on the US stock market. For the past 30 or 40 years, Baby Boomers and Gen Xers have been contributing to 401Ks and IRAs and investing mostly in stocks. But as those people start retiring and even before as they begin to reduce their risk exposure to stocks, we will see negative price pressure on the US equities market.
The above factors are problematic for those looking to invest. If the US equity markets are over-valued, and the US housing market has limited upside, and corporate employment is poised for a slow-down in hiring, are we really faced with limited investment opportunities? This is probably why more sophisticated investors such as the yale endowment fund (profiled here by Financial Samurai) have such a low allocation to US markets.
Where is a good place to put our money? Bonds, developed international markets, emerging markets?
For me, the take-away is that over the next 20 years, it is going to be difficult to generate returns consistent with historical levels. There will be pockets that outperform, but the broad market may be challenging.
I would love to hear from folks who have a different opinion about limited investment opportunities, the state of the US employment, housing, and equity markets? And if you do not disagree, what other investment opportunities do people see?
Note: Please remember that this article simply reflects my opinion. In no way am I an expert and any of the above predictions or comments are not necessarily based on factual information and could be false. You should always make up your own mind before investing.
[do_widget id=text-8]
A very interesting read on the impact of the different generations on the US economy and stock market.
Most of this is new info to… It will have to digest…
One thing that stands out: having to wait till 35/40 before buying a starter house means that you are used to renting… why then change?
That’s what I thought too. Especially if you’re looking to retire in your 40’s, why would you want to start paying a mortgage then?
I’m interested to hear from readers about my thought process. Do you agree? Or am I reading too much into it? Maybe there are too many other variables impacting.
On the pressure of selling by people reaching retirement… Could that be compensated by the working people that buy? Has that not been the case since ever in the US?
I completely agree with you both on why buy when you’ve been renting so long. I guess the main reasons to buy are that it gives you more security and can be an appreciating asset depending on where it is. But there are downsides as well.
I do have rental investment properties but choose to rent where I live. Renting cost half of what a mortgage would be and I don’t have any additional expenses like insurance, maintenance, repairs. And since I’ve retired early, what bank would lend me the money anyway. So to buy a property now I’d have to go back to working full-time. Why would I want to do that?
I haven’t looked at renting vs buying in a while, but the comments have me thinking I may do another post about it.
You may be right. Although there were more Baby Boomers than any generation before or after, as long as Gen Xers, Millennials, and post-Millennials aggressively invest, everything should stay in balance.
Well, that’s a downer of an article! Just kidding – it’s actually very interesting. I love looking at the differences between the generations and how they think.
On your note of where to put your money, maybe that’s going to be another opportunity to invest in rental properties? Housing prices going down with an overabundance for sale, rents going up with more tenants renting – might not be a bad deal.
— Jim
Maybe I’m too much doom and gloom. I hope so.
Good thought on rental property. People need to live somewhere. If they’re not going to buy, they will rent.
Times have definitely changed – and continue to do so! My grandfather worked is way through MEDICAL SCHOOL by delivering milk in the mornings. lol. Try finding a part-time job today that will cover that $50k bill every year.
I somewhat agree with you regarding the stock market struggling as Baby Boomers retire. My views were the same as yours a while back, but then I started realizing that they will be pulling their money out largely to cover their retirement years. So, although some of those funds may go temporarily into bonds/etc, I believe I lot of it will go into funding their travels, grand children, and ongoing expenses.
As we all know from Economics 101, the more that is spent, the better the economy does (even though that doesn’t make sense from a “stewardship” perspective). So we’ll see… Either way, it’s definitely going to be an exciting future!
That’s an interesting view. So even though demand for US equities may decline as investors reallocate, the performance of the underlying companies will improve as retirees spend that money. I can buy that. 😎
I do think there will be opportunities. Senior housing is one area I think will continue to grow for the foreseeable future.
Great read, FS. As you commented on my blog — we both have similar thoughts.
All is not well in the world, even though the Fed and the media would like to convince us otherwise. Its like we never learned our lesson from the last financial crisis. Looking at the macro view, things look just as bad or even worse now than it did in 2007.
The media like to paint it with localized recessions (transportation recession, trade recession, earnings recession, manufacturing recession)…but these are not localized instances. These are all going to blow up in our faces. I remain skeptical in investing more of my hard earned money in this market.
R2R
I may decide to pay down mortgage debt rather than invest. It’s a guaranteed 4%. Not great, but better than a loss.
It is interesting times we live in. There will always be some sort of problems in the USA, or even the whole world. So don’t let it mean sitting on 100% cash. There will be companies that continue growing in value, even if the overall market declines. For a DGI investor, declining markets (assuming there isn’t a corresponding decline in earnings at the same pace) will mean increased yield on each purchase.
We are long term renters. Even if we didn’t have to do IVF, we’d still rent. Melbourne, Sydney, other global cities are all far too expensive. We don’t want to sink that much of our wealth or future earnings into a non-earning investment (home). We will rent and invest. At some point there will be many more houses on the market.
Our investment strategy is to focus on businesses that offer services to elderly people. The old-person market will grow a lot in the coming decades, they have absorbed a lot of wealth, which they will want to spend. These companies’ earnings will grow.
Tristan
I agree. The seniors industry is one that I am excited about. That’s where we are putting money into specific companies rather than just indexing.
Hey great post, very interesting on the different perceptions between the generations. I think with rising cost of living and tax burdens personal tax planning and investments will really pay dividends in the long run.
I think you are right on most of these fronts. And I’m glad to see a post that doesn’t bash millennials for the problems they did not create. In my field, I see so many 80+ year olds working because they “wouldn’t want to be bored” or haven’t planned properly financially. In one office, a man was literally paid a dollar a year and health insurance. With 60+ years in the field, of course the employer wanted his expertise at the bargain. He was not training up young workers though. He could have been an amazing resource. Instead he prevented others from getting a job and knowledge. It was so frustrating. Of course, they did not hire anyone when their internships or trials ended. They kept their free labor and wished us well.
The Millennial generation has developed a unique skill set – the ability to freelance and take advantage of the shared economy. This skill wasn’t developed intentionally, but rather out of necessity.
It will be interesting to see how the working world evolves over the next twenty years.