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How Low Will It Go?

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November 20, 2008 – Comments (12)

I was asked for a clairification on my Dow 7000, S&P 700 position. 

To me, this is where I start looking at the market again, but that doesn't mean a 100% full commitment back into the market.  I may look and decided I don't want to touch it.  It is my re-evaluation point.

Longer term, I don't see how the markets perform like they have in the past.  I think Japan is a good place to look and I think that because of demographics.  They've had to deal with the aging population problem first.

The market is about supply and demand.  Right now there is a glut of people in pre-retirement age and they are buyers in the market, through their personal savings, retirement savings and indirectly through their company pension plans.  With an aging population the numbers start to swing to less demand for investment as more people are drawing from the plans.  It is a gradual thing, but when you have an age bubble, as with the baby boom, it can't do anything else but push the price of investments beyond a fair value, and I can't see how the reverse is avoided as the population ages.

And if you look at the generation below the boomers, well, so many are struggling, when mom and dad pass on many of them will not want investments with their inheritance but will want to reduce and over burdening debt.  So, longer term I think as their is an acceleration of death in the baby boom population that is not going to be good for investments.

I think we are also going to see major problems in that people have been paying for health insurance that has not been putting adequate reserves aside for their commitments, indeed, I think we are going to see more insurance is bad as the population ages and their are more demands for payouts.

I tend to think we are at the end of a historical trend and going forward people who make their investments based on past experiences are going to find those experiences do not live up to expectations.

It is interesting when you look on your life and question what was one of the most significant things you studied and I'd say it was an economic history course in university.  I remember at the time complaining bitterly about what the heck did studying slave and serf economies have anything to do with today, but, I think that course has shaped my thinking about the market more then most other things that I've have done.  I see the debt slaves of today as being fairly equivalent to serfdom.

The other thing about economic history that I found interesting was how often there were swings in the age that people started families.  I had the mistaken belief that this business of starting families later was somehow related to careers, but it isn't.  When there are good jobs without further training people go to those jobs.  Increases in career development happens when opportunities decline, as does the average age for first child in families.  And history repeats itself this way over and over again.

So, I don't have a clue as to how low it will go, but I think there are long term challenges that will make the investing environment very different then in the past.

12 Comments – Post Your Own

#1) On November 20, 2008 at 7:08 PM, Tastylunch (29.41) wrote:

Depressing but makes sense. The recent fall will probably only accelerate boomers moving out of stocks. Nobody likes to lose money.

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#2) On November 20, 2008 at 7:14 PM, kdakota630 (29.72) wrote:

Good!  More stocks for the rest of us.

LOL!

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#3) On November 20, 2008 at 8:01 PM, johnw106 (58.41) wrote:

I think you can add the "burn factor" to the boomer problem. There are a lot of boomers who are just now hitting the age of fifty. They have been burned bad by the "buy and hold mutual funds" in their 401k plans. Once they get out they will not get back in.
Even if they continue to put money in a 401 it will not be in equity stocks. It will go to bond and t-bill funds. I look for the vast majority of burnt boomers to shift their money to old fashioned and very safe CD's and savings bonds at their local banks. Cries of "infaltion will eat it" will fall on deaf ears.
So  a lrage percentage of cash over the next twenty years that would have went into equity stocks will simply go elsewhere.
If I am right in my thinking you will not see a DOW of 10,000 in the next thirty years unless there is a dramatic and sudden shift in America from a consumer society back to a basic manufactoring society. From a net importer to a net exporter. Its as simple as that.

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#4) On November 20, 2008 at 8:21 PM, MikeMark (29.53) wrote:

Well spoken.

Thank you.

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#5) On November 20, 2008 at 9:43 PM, thecage41 (97.73) wrote:

I agree with your take for the most part.  While in the future we should expect lower price appreciation, shouldn't we also expect higher dividend yields?  That is, the boomers stay out of the market but still consume, meaning approximately equal earnings, but lower demand for stocks = higher yields?

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#6) On November 20, 2008 at 10:01 PM, dwot (60.71) wrote:

thecage41, excellent point, but wait until a bit more fallout to know who can still afford dividends and how much.

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#7) On November 21, 2008 at 12:21 AM, kfisherprotege (30.58) wrote:

very astute observation.  US is becoming a demographic inverse "tower of hanoi", just like japan was in the 80s and many european nations are today.  look to the normal "towers of hanoi" countries that will benefit from youthful energy and innovation once this global recession passes. i'm looking to india, china and southeast asia to take off in 2010 and beyond.  india and china have very active space programs -- a sure sign of progress.

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#8) On November 21, 2008 at 1:12 AM, rocksnot (29.08) wrote:

Nice blog post, and dead on, I think.  It seems to me that stocks that are closely tied to U.S. consumers will not achieve the historical average of 10% a year, for the next 30 years. 

But I hesitate to say that about the SP500, since most companies have become so increasingly global.

On the other hand, I seem to always think that stocks are generally worth less than they end up being most of the time.  Humans seem so intrinsicly optimistic to me.  I KNOW that after some years pass, there will be another bubble, and we'll all jump on it, and ride it for all its worth.  Maybe solar finally punches through grid parity and beyond in the next decade, or maybe advances in robots really takes off, or advances in genetics creates all kinds of newly found value.  I don't know what the next bubble will be, but maybe 5 or 10 or 20 years from now, people will have found new reasons to say, "it's different this time, it's not a bubble."  I can only hope to be a step ahead of them.

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#9) On November 21, 2008 at 11:00 AM, Timh0rt0n (96.89) wrote:

Dwot, that was very helpful as are many of your post. I am not sure if you have shared this before but what sort of background in investing do you have? Are you an advisor for a firm?

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#10) On November 21, 2008 at 1:47 PM, kurtkalamar (< 20) wrote:

Count me in as someone who is deeply concerned over the potential shortfalls facing America.  

 At this point it appears the government will continue deficit spending to try to backstop as much as they can and reverse the current trend.  A lot of people say this will lead to a bond market dislocation, but the question is where the money will go,if not into U.S. debt.  This downturn is of a global scale.

I'm expecting the S&P 500's P/E ratio to fall to about 7 or 8 based on historical evidence.  Depending on how disastrous earnings get, the S&P might have fo fall quite a bit farther than 700 to hit that target. 

 

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#11) On November 21, 2008 at 2:46 PM, jesusfreakinco (28.99) wrote:

For those of you that haven't seen this - watch the 30 minute portion:

http://www.iousathemovie.com/

You need to factor this into your long-term thinking...

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#12) On November 21, 2008 at 9:22 PM, goshaw (39.15) wrote:

I think today's rally is showing how desperate people are about the market. I agree. The market will go down more.

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