The End of the Baby Boomer

This certainly is not news. The baby boomer generation is definitely at the end of its productive life cycle and is headed into the retirement phase, but this demographic shift certainly brings with it a change in the way that we should look at the American economy going forward.

Think of health care. The system was recently "improved" to capture millions of uninsured Americans just when the demographic shift makes the hole in this budget item even more acutely painful. The health care investment thesis basis its analysis on the spending side of the equation and to be sure this should accelerate as more and more baby boomers advance in age. However as more and more baby boomers die there is less and less demand and as time goes by this demand will fall off a cliff.

In addition just as the cost of financing health care and a burgeoning budget deficit spiral ever upward, the base of tax payers paying the bulk of the taxes (the middle class) will level off and could even shrink. This is not a long term trend that bodes well for future government plans to reign in spending. Just take one look at the struggle that Japan is having since their bubble population moved into the retirement years. At present Japan's pension fund is liquidating assets at 5 times its normal rate to support pension payments and the economy is still struggling 20 years after the Nikkei peaked. This could easily point toward an extended period of contraction in the US economy and is certainly not a scenario that the market or the Federal Reserve is taking seriously at present.

Furthermore the age at which people are getting married is rising rapidly. This bodes poorly for population growth and for housing. Home ownership is far more likely when married than when single. Married couples normally have less children the older they are. Less children mean less demand in the future and less marriages mean less demand for housing at present. Certainly not an ideal situation for the housing sector particularly in this poor economic environment.

Now do not get me wrong, this is not going to happen overnight. Demographic shifts happen over decades and not minutes, but it certainly is a theme that should be monitored and should slowly be factored into your investment strategies going forward. At the very least these demographic trends point towards an extended slow down in the US economy for at least the next decade and maybe longer.