Monday April 28, 2008
The Commodity Crisis
In my book Cash-Rich Retirement, I coin a term to describe one kind of faulty investment thinking. The “Supreme Fallacy”, I say, is the cataclysmic belief that we can invest over the next thirty years just as we’ve done in the past without taking demographics into account.
Demographics, I argue, is a prime mover behind investment and commodity values. However, we routinely ignore population changes and aging patterns when we invest or, for that matter, shop for food or gas or housing.
It’s time to wise up.
Profound demographic changes are taking place. In the U.S., the aging of our population is already having — and will continue to have — a powerful impact on asset prices, commodity prices, and investing. As Laurence Kotlikoff and Scott Burns put it in their excellent book The Coming Generational Storm: What You Need To Know About America’s Economic Future: “…as millions of baby boomers move into old age, walkers will outnumber strollers… and there will be twice as many retirees as there are today but only 18 percent more workers.”
As I explain in my own book, this will result in marked changes in consumer activity, investments, and taxes. Demographics may well portend investment turbulence ahead.
We are entering an era when huge numbers of Baby Boomers will begin shifting assets, migrating from stocks and real estate into bonds and cash for retirement. The impact, I argue, could be painful. Hence, my book explains ways to defend your savings from damage if, indeed, there is more investment turmoil ahead.
And there will be! However, we continue to trade stocks, comment on the markets, buy and sell real estate, and discuss investments in general as if there were no demographic threat at all. I call this The Supreme Fallacy.
Demographics are an important factor that should always be taken into account when we value a stock or house or sack of rice. When millions of American men returned from World War II, they started families, bought new homes and began a spiral of economic activity that had never been experienced so mightily. Our population underwent unprecedented growth. And great population growth, in turn, impacted the demand for assets and investments profoundly.
In the U.S., western Europe and Japan, Baby Boomers — the people born between 1946 and 1964 — accelerated the consumer surge. The results were stunning. Never before in human history had so many people sought education, medical care, shelter, food, energy, and entertainment.
Not surprisingly, investment activity soared. In the United States, the stock market moved up spectacularly as Boomers moved into their peak earnings and investing years beginning in the 1980s.
In Cash-Rich Retirement, I survey the views of a number of finance experts as to what we might expect as Boomers now begin a very different migration — the migration of 78 million Americans into retirement. Many millions of people in this country are beginning to move into retirement and change their investment patterns. They will begin looking to sell assets for cash. And while some argue that Baby Boomers, themselves, cannot possibly cause the investment markets much upset, I believe that Boomers plus their pension funds plus the target date funds in which they are investing will, indeed, cause a forceful shift in the markets.
The transition may not play out calmly in many industrialized countries. However, other demographic shifts are also in play. Countries such as India, China, Brazil, and Indonesia have very different demographic patterns. They are in the process of adding millions and millions of young, prime consumers and prime investors while our population ages.
We are therefore just beginning to experience a very new and very different “Big Boom II”. The demand for food, shelter and energy is going to soar in many developing countries. The demand for health care and cash is going to soar in ours. In fact, these changes have already begun to happen. We see the impact at the gas pump and in food prices.
In Cash-Rich Retirement, I show that commodities and raw materials are likely to be “safe haven” kinds of investments going forward precisely because of increasing global demand for them. We are beginning to experience a surge in demand for staples — rice, wheat, oil, gas, steel, basic metals, and even water. And this heightened demand, I suggest, will intensify sharply over the next 20 years because of prevailing demographics.
Make no mistake about it: massive population changes are happening, and they are permanently changing world demand for commodities, assets and investments.
Of course, other factors are also contributing to sky-rocketing food and energy prices. They include tax policies, a weak dollar and — yes — outright greed. Count on many commodity companies showing record profits in coming years like oil companies today. We will also hear stories of commodity hoarding, price manipulation, and the inflationary impact of futures contracts on commodity prices. Underlying them, however, are the even more defining, primal changes in population, body-count, and demand.
What does this mean? It means that we are likely to experience great volatility as well as on-going upward spikes in commodity prices as hundreds of millions of today’s young adults, teens and toddlers in Asia and Latin America seek homes, food, and capital-accumulation opportunities. Hence, give thought to investing in dividend or earnings-weighted indexes and ETFs in commodity-producing companies and agri-businesses. I name some in Cash-Rich Retirement. And additional ones have come to the market since I wrote the book.
As I explain in Cash-Rich Retirement as well, it’s time to increase your holdings of non-U.S. assets. International investments, I make clear, should represent about 50% of your total holdings. I name the specific kinds of investments to consider in my book.
The bottom line is this: Demographics are the tectonic plates underlying investment markets. Pay attention to them. As population patterns shift, be mindful of global demographics and the aging taking place. Step up your international holdings. Avoid speculation. Expect commodity prices to soar. And capitalize on — rather than be penalized by — the profound demographic and demand changes that are taking place. My book can help you.
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