Boomers as Retail Clerks Shows Why Greenspan Saw Low Growth Era – Bloomberg 12-18-13

Salient to Investors:

  • Expanding populations fueled global prosperity with both workers and consumers but global aging threatens to cause chronically weak economic growth, a more volatile international economy and the risk of a new financial crisis triggered by innovative investments dubbed “death derivatives.”
  • Rob Arnott at Research Affiliates said our era of the most benign demography for GDP growth in history is ending, and a future with vast numbers who no longer produce and a diminished workforce assures class and generational conflict. Arnott and colleague Denis Chaves said living standards will rise more slowly as the demographic tailwind of the post-World War II era turns into a headwind.
  • A 2012 National Academy of Sciences study predicts US output per person through 2030 will rise only two-thirds as fast as in the past half-century due to falling birthrates and longer lifespans. The ECB says European workers must double their productivity – to levels seen in the 1990s Internet boom in the US – for economic growth to reach just 2 percent.
  • China’s working-age population over the next two decades will shrink as a result of its one-child policy, reducing more than 2 percent from annual growth.
  • The IMF posits that central bankers’ traditional tools may prove ineffective in economies dominated by older populations, leading to greater volatility, while persistently low interest rates could invite frequent brushes with deflation or reckless private-sector borrowing.
  • The BIS said that if people live just 3 years longer than current forecasts – or the typical margin of error – the $15 trillion to $25 trillion in global pension fund obligations will increase by $1.4 trillion to $3 trillion, and losses arising due to longevity risk may affect destabilize the financial system.
  • An American male born in 1940 had a life expectancy of just over 61 years versus over 76 years if born in 2012.
  • The National Academy of Sciences said that the US is not facing an insurmountable challenge if it adopts early changes to Social Security, Medicare and Medicaid, higher savings rates and longer working lives.
  • 19 percent of Americans age 65 and older work, the highest level since 1965 and almost twice the 1985 low.
  • Eurostat predicts that by 2050, fewer than 2 European workers will support each retiree versus 4 today.
  • The Census Bureau estimates that by 2030, more than 1 in 5 Americans will be at least 65 versus 1 in 7 today, and by 2056, the over 65s will outnumber the under 18s for the first time.
  • George Magnus at UBS said the labor supply is going to become stressed, and a return to 3 or 4 percent growth is not going to happen. Magnus said immigration at 10 to 20 times current levels could help Europe avoid further declines in the working-age share of its population but that is not going to happen.
  • The US labor force over the next decade will grow at an annual rate of just 0.5 percent, or one-fifth the rate between 1974 and 1981.
  • Annual US growth rates will likely fall below 2 percent versus more than 3 percent during the two decades that preceded the last recession.
  • National Academy of Sciences said that even if the US admitted almost 1 million extra immigrants each year, the retiree-to-worker ratio would continue rising.
  • More than 40 percent of Japan’s population is neither employed nor looking for work.
  • Greenspan said the sheer number of retiring baby boomers already has rendered obsolete the inverted yield curve forecasting tool.
  • Patrick Imam at IMF said older individuals have little appetite for borrowing or risk so may be less sensitive to interest-rate movements than younger populations. Imam said the Fed et al may need to act more dramatically to manage an economy dominated by the old: like raising or lowering interest rates by a full percent rather than the customary quarter-point moves.
  • Most corporate pension plans already are underfunded: Towers Watson say the 429 Fortune 1,000 companies that sponsor defined-benefit plans were $418 billion short at the end of 2012.
  • Amy Kessler at Prudential Financial said pension managers do not use up-to-date tables and so may perceive that their liability is lower than it actually is.
  • If each covered person lived on average one year longer than anticipated, the global pension bill would rise by $450 billion to $1 trillion. A cure for cancer, for example, would mean that the investment banks et al that assume longevity risk would face catastrophic losses as pension plan participants lived years longer than envisioned.
  • Adam Posen said the demographic changes facing pension funds and insurance companies is scary and remain among the biggest dangers for which there is simply no good answer.

Read the full article at http://www.bloomberg.com/news/2013-12-19/boomers-as-retail-clerks-shows-why-greenspan-saw-low-growth-era.html

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At 61 She Lives in Basement While 87-Year-Old Dad Travels – Bloomberg 12-17-13

Salient to Investors:

The median net worth for US households headed by boomers aged 55 to 64 was almost 8 percent lower, at $143,964, than those 75 and older in 2011. Boomers lost more than other groups in the stock market and housing bust of 2008, and many also lost their jobs in the aftermath at a critical point in their productive years.

An AARP Public Policy Institute survey found that over half of those aged 50 to 64 expect their standard of living in retirement will be worse than their parents.

Alicia Munnell at BostonCollege said baby boomers are the first generation without the safety net of pensions and other benefits their parents have, and face a much more challenging old age.

Boston College said the median 401(k) balance for households headed by baby boomers is $120,000.

37% of the elderly and less than 10 percent of boomers in the US collect pensions and that number is quickly shrinking.

Fidelity Investments said hospital, doctor and medicine expenses for a 65-year-old couple retiring this year are expected to be $220,000 over the course of their lives, as company-paid retiree health benefits disappear and the cost of Medicare rises.  

Read the full article at http://www.bloomberg.com/news/2013-12-18/at-61-she-lives-in-basement-while-87-year-old-dad-travels.html

Click here to receive free and immediate email alerts of the latest forecasts.

The median net worth for US households headed by boomers aged 55 to 64 was almost 8 percent lower, at $143,964, than those 75 and older in 2011. Boomers lost more than other groups in the stock market and housing bust of 2008, and many also lost their jobs in the aftermath at a critical point in their productive years.

An AARP Public Policy Institute survey found that over half of those aged 50 to 64 expect their standard of living in retirement will be worse than their parents.

Alicia Munnell at BostonCollege said baby boomers are the first generation without the safety net of pensions and other benefits their parents have, and face a much more challenging old age.

BostonCollege said the median 401(k) balance for households headed by baby boomers is $120,000.

37% of the elderly and less than 10 percent of boomers in the US collect pensions and that number is quickly shrinking.

Fidelity Investments said hospital, doctor and medicine expenses for a 65-year-old couple retiring this year are expected to be $220,000 over the course of their lives, as company-paid retiree health benefits disappear and the cost of Medicare rises.  

Barrack Says Home Investors Have Yet to Figure Out Exit – Bloomberg 12-17-13

Salient to Investors:

Thomas Barrack Jr. at Colony Capital said:

  • Institutional landlords building home-rental businesses in the US have yet to figure out the best way to sell their investments as they focus on expansion, while nobody is worried about an exit.
  • 5 companies, including Colony, own 200,000 units, or less than 1.5 percent of the 14 million US single-family houses for rent.
  • The single-family landlords that have gone public are trading at book value versus 2.5 times book for apartment REITs.
  • Over the next 2 or 3 years the income off these houses will be proven to be exactly analogous to multifamily investments.

Read the full article at http://www.bloomberg.com/news/2013-12-17/barrack-says-home-investors-have-yet-to-figure-out-exit.html

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Pimco Says External Growth May Lift ‘Not Stellar’ Asia – Bloomberg 12-17-13

Salient to Investors:

Ramin Toloui at Pimco said:

  • Asian growth is stabilizing but not stellar but may receive a boost in 2014 as developed markets accelerate.
  • Asia’s trajectory will continue to be shaped critically by the growth path in the U.S. and Europe
  • China’s growth in the next decade requires a rebalancing of the economy toward household demand, but near term, its performance will be dominated by the dialing back and forth of the credit conditions by policymakers.

Robert Mead at Pimco said limited evidence of any non-mining investment, except in housing, means Australia’s growth outlook is weak, and recently announced cuts in manufacturing will also hurt growth in the next few years. Mead expects the Australian dollar to depreciate further.

Economists forecast 4 of Asia’s 5 largest economies outside Japan are slowing as regional expansion stalls at 6.23 percent for a second year.

Read the full article at http://www.bloomberg.com/news/2013-12-17/pimco-says-external-growth-may-lift-not-stellar-asia.html

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North America to Drown in Oil as Mexico Ends Monopoly – Bloomberg 12-16-13

Salient to Investors:

The flood of North American crude oil is set to become a deluge as Mexico dismantles a 75-year-old barrier to foreign investment in its oil fields.

Ed Morse at Citigroup said Mexican oil output could double from inviting international explorers to drill there, the equivalent of adding another Nigeria to world supply.

Pablo Medina at Wood Mackenzie sees a huge opportunity for any kind of player in the energy sector as all the companies have to start analyzing Mexico, and said the first assets to attract foreign investment will be mature oil fields drilled decades ago and reservoirs that need injections of steam or CO2 to coax more crude out of the ground, followed by deep-water prospects, shale and other technically challenging endeavors. Medina said the level of investor interest will be partly determined by which assets Pemex chooses to keep and which to auction.

Analysts expect an influx of Mexican oil lower the price of Brent crude to as low as $88 a barrel in 2017; 5 of the 7 analysts said prices would be lower than this year.

JPMorgan Chase said the reform could increase foreign investment by as much as $15 billion annually and boost potential economic growth by 0.5 percent.

The US EIA said US crude production will expand to 9.5 million bpd in 2016, the highest since the all-time high of 9.6 million bpd in 1970.

Riccardo Bertocco at Bain said a doubling of Mexico’s output may be slower to realize than the most bullish predictions as companies confront barriers in accessing capital and human resources needed for development – an increase of 1 million bpd is the most realistic upper limit by 2025 based on the cost for new infrastructure, competition for new fields and opportunities all over the US.

Kurt Hallead at RBC Capital Markets is not expecting any significant impact from the reform in the next two years as Mexico will need to decide on tax rates, royalty structures, standards for booking reserves, etc., and conduct bidding rounds for licenses, and additional exploration, such as seismic tests.

Jose Antonio Prado at Holland & Knight said Chicontepec is just one of the over-budget, long-delayed projects for which Pemex will be eager to find partners, while Mexico will be able to incorporate private participants in existing projects as well as new opportunities. Prado said US and European banks and investment funds will be in Mexico next year in various forms trying to seek new opportunities.

Carlos Solé at Baker Botts said the reforms are especially important to open up exploration in Mexico’s deep-water fields, where additional capital and better technology and expertise are needed.

Read the full article at http://www.bloomberg.com/news/2013-12-16/north-america-to-drown-in-oil-as-mexico-ends-monopoly.html

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