Baby Boomers and Investment
People invest primarily for retirement, and they build up wealth as they get older. When they retire, they sell assets to pay for their living expenses. When age cohorts are stable, is no impact on asset prices from retirement. However, when there is a demographic shift and lots of people retire at the same time, the elderly will sell off their assets, shifting out the supply curve and driving down prices.
A baby born in 1950 would be 62 today, just 4 years from Social Security retirement age. Given that life expectancy has continually improved over time, baby boomers are expected to spend more time in retirement than any previous generation.
Stock Market Returns
There are two key concepts for investments: returns and the value of the stock market. Returns are how much you get each year for a given investment. If a $100 stock pays $7 per year, the return is 7%, even if the value of the stock remains at $100 forever. The value of the stock market is the price of each stock times the number of shares of the stock. The value of the stock market cannot grow faster than the economy in the long run. The return on stocks can be higher than the growth of the economy, so long as dividends are not reinvested. In any event, it is unlikely that the stock market will return anything like it has historically in the long run. The capital stock can grow, but it faces diminishing returns, especially when combined with a shrinking workforce.
The Price to Earnings Ratio
The Price to Earnings Ratio is the price of a stock divided by the stream of dividends. It is highly variable, but does not have an upward or downward trend in the long run.
The Great Stagnation
In Tyler Cowen’s book, The Great Stagnation, he discusses how, since the mid 1970s, growth has dramatically slowed down. The economy has become dominated by a few highly regulated sectors which are slow to innovate, such as health care. Signaling, ineffective, futile, bureaucratized, end of life, health care. The areas with the most rapid growth are not things that old people spend money on, so the Stagnation will get worse, not better, even if technological improvement continues. Technology tends to make health care more expensive and more unequal. These is no sign that the government will become less involved in providing health care/insurance anytime soon, so there is little pressure on firms to cut costs.