The Coming Retirement Crisis (w/ Raoul Pal)

it's very comfortable now may not be so comfortable later on and that's what I might have to take out you know my mutual funds my only worry is my dad worked for the state of Illinois the state's pretty much insolvent and like even his health care which is through the state of Illinois it could take up to a year for him to get reimbursed for things like that so that is worrisome retirement is all some people ever think about especially the 50 million plus Americans set to retire in the next few years they obsess over it like my dad did it's what they work for it's their dreams but those dreams could be shattered you're about to hear real visions founder and CEO Ralph al explore why we're heading into a retirement crisis in America and around the world as many people take on more risk than they understand I was curious to see if anyone was thinking about this so we spoke with people in New York and heard the same story over and over people pushing off retirement people not having enough savings people relying on government pensions here's some of what they said no no way I could have saved enough time I mean I have enough to retiring let's say if I want to go to Wyoming or something like that I saved enough for at least the next 10 years who knows with inflation what will happen but I feel next ten years I'm ok if the United States government goes out of business then my pension won't be there these stories were just a small sample of what we heard and this is not just something that those actively looking for retirement are going to face it's something that's going to have a big impact on my generation as well whether it's figuring out pensions or Social Security or potentially supporting our own parents retirement is part of the promise of life in the developed world and if that promise isn't met it's really going to affect everyone whether you're hoping to retire in five years or 50 my name's Ralph Powell I'm the CEO and co-founder of real vision but today I'm talking on behalf of global macro investor my research business I want to talk about what I think is the biggest single theme of our generation and I think it's the most important thing that anybody can understand and it's all about the pension crisis you see demographics is the big story of our time and it's all about the story of the baby boomer generation this was the largest generation of people the world have ever known in the richest countries in across the globe now that generation drove all of the macroeconomic forces that we come to recognize as normal now that was when they first came into the labor force back in the 1970s when there were 20 or so years old what they did was they bit up the demand for goods because if you think about a record number of people came in to buy their first suits at their first house their first car that first table their first chair everything was new that demand created an enormous problem for the world to deal with and it created the inflationary environments of the 80s yes there were monetary reasons behind that as well but really a lot of it was driven by demographics now as that generation moved through their lifetimes they had a particular set of behavior patterns that affect the financial world particularly the main one is the fact that after the Second World War that young generation decided they didn't want to be their parents as almost everybody does and they said we don't want to be austere their parent has lived through two world wars what they wanted to do was spend they wanted to be free of the shackles of the things that their parents had had in the past so what happened was Wall Street being clever as ever came up with this genius idea it was the pension plan now pension plans have existed for a long time before but really this is where the pension plan became everything Wall Street fed them a story the story was simple you don't need to save as much money as your parents you don't need to spend or save 20% of your income what you need to do is give it to us we're the smart guys and we'll turn it into more money and that means you'll have more money to spend so that started the largest stock market boom in all of recorded history now the other thing that happened is as consumption became a larger part of the economy and that was driven by government policy as well though baby boomers were offered another piece of magic from Wall Street they were offered credit so in the 80s Ronald Reagan and Margaret Thatcher basically allowed credit to be available to everybody so suddenly the credit boom took off so there we have to monetary booms happening at the same time the baby boomers who've stopped saving have given a little bit of money from their 401ks to Wall Street that starts accumulating quickly their income has also then gone into credit the servicing of credit to buy more and more goods that trend continued for a long time the trend of consumption within the US economy continues to this day it's massively outsized because of this credit boom that meant that Wall Street became outsize – it was taking the money from the pension system and investing that or speculating with it and also making money from the credit side now that all ended in the complete blow up that happened in 2008 but why did 2000 happen well interestingly enough that's when the first baby boomers started retiring when they started retiring suddenly there was some sellers of stocks before that everybody had been buying stocks every single month in their 401k buying the dip mentality became the key thing for the world but the problem is now we're facing the demographic time bomb I remember when I was back at Goldman Sachs in the late 90s some of my colleagues wrote an article called the demographic time bomb and that was about the issues the world will face in the future as retirees start retiring and whether the state sector could afford all of the draw on the capital now I'm not going to talk about the state sector at this particular presentation we all know the story that there's too few Millennials and younger people paying into the system to pay for these retirees the maths don't add up so the entitlements can explode and these numbers could be in the hundreds of trillions of dollars but I don't wanna talk about that I also don't want to talk about the defined benefit pension system that's another big story that I think many of you are aware of we've seen it all across America and all across Europe into the UK where defined benefit pension schemes will never be able to afford to pay out the promises that they had to the retirees you see the returns in financial markets weren't quite as good as the snake oil salesmen and Wall Street told everybody and that was a problem it's kind of like a Ponzi scheme the first people to get out made all the returns the last people to get out get nothing and that's the real issue the real issue is all of this is coming to a head because everybody is about to retire if you look at the chart of the baby boomers reaching retirement age you can see it's a demographic wall currently we're retiring about 3.9 million in America alone baby boomers and it goes up in a straight line all the way through to 2027 what we've got is more and more people every year retiring that is an extraordinary state of affairs because retirees have a different behavior pattern than the average person you can see the chart in a different way here you can see that the average retirement age is currently around 64 in America and this year 2018 the average baby boomer is 64 it's telling us the average person is destined to retire this year but the real question is here who can afford to higher you see if we look at the retirement age of Americans the actual retirement age is going up and those who haven't retired they're deciding that they're going to have to work longer to you see the real issue here is that people can't afford to retire so they're having to extend retirement either expected or current retirement dates out into the future if this problem of not being able to afford retirement that is creating the problems we've got today the other way you can look at this is when I look at the labor force participation rate of the people above 65 years old oddly the 65 year olds have been coming back into the labor force at a record rate they're competing for jobs with Millennials and others this is an on state of affairs and again is driven by the issue of these baby boomers having far too much debt to retire and not enough savings so let's drill down to the numbers it's really important to understand the numbers behind what I'm talking about so let's dig into the stats see the u.s. average pension benefits of $23,000 a year but there's a bit of an issue because disposable income per capita is forty four thousand dollars a year now the ideal retirement income that these people want obviously matches their disposable income which is about forty four thousand to forty five thousand dollars a year but really when you impute from their savings what they only get is another nine thousand dollars so their total benefits are about thirty one thousand versus their needs of about forty five thousand this is a huge problem there's a 30 percent shortfall in their savings and that has to come out of consumption I think many of you have seen this before it's the household net worth the average net worth of the American household and it looks pretty good right they've got twenty four thousand in bonds Americans don't seem to like bonds and that's something I'll talk about in they've got two hundred and sixty nine thousand dollars of equities three hundred thousand of real-estate savings of a hundred and seven thousand pension plan assets 264,000 and other savings and assets of about one hundred and twenty thousand now that's a pretty healthy million-dollar balance sheet so what's the problem the problem is it's massively skewed by the one percent that one percent that we hear about versus the 99 well they've got all the assets and all the savings when you strip out the data for the one percent and calculate the median net worth it's an entirely different game the median net worth offers something that I think is terrifying and sad the average person has four thousand dollars in their bonds their forty five thousand dollars in equities fifty three thousand dollars in real estate which is extraordinary right that is all they have after their mortgage it's fifty three thousand dollars for a lifetime worth of household investment their savings of eighteen thousand pension fund assets of forty four thousand and other assets of twenty thousand you see the problem is is these people are benefiting from one of the biggest ships the world has ever seen life expectancy life expectancy although it dropped a couple of times a couple of years running recently in the u.s. is rising so life expectancy in America and across the world is an exponential trend higher it is going higher and higher every single year obviously the last couple of years with the opioid epidemic saw a bit of a pullback but generally the average American doesn't know how long they're going to live for it's going to be longer than they thought you see not knowing how long you're gonna live for changes your behavior pattern it means that you stop pushing out your retirement date because you don't have enough money to retire because if you've moved your life expectancy on five years well then you need a lot more money in a low interest rate environment it becomes almost impossible to generate the income so drawing down on capital very very rapidly so let's look at this balance sheet to see where the capsule really is now what you have to understand is US households have really taken on board the fact that they're going to live longer and they don't have enough savings because after 2000 and 2008 the world hasn't generated enough returns so what they've done is taken the most amount of risk possible normally if you're about to retire you should be increasing your fixed income allocation to guarantee your future retirement income however behaviorally speaking if you don't have a high enough income to return on you have a kind of or bust scenario what you have to do is take that risk that risk for American is buying real estate and they did that in droves back in the 2000s now they got burnt in that and they don't have much network left in that any longer so the real driver of net worth has been the equity market the equity market is the only driver of net worth going forwards and this is meant that people have doubled up their bets and tripled up their bets they have this bet directly in equities and they have this bet in their pension plans the pension plans themselves have record holding of equities versus fixed income they also have record risk in terms of credit private equity venture capital hedge funds they all have equity like returns their risk seeking investments and they're doing this because nobody can fund the retirement it's the same story a government level it's the same story at defined benefit pension level and it's the same story for households in their 401 k's corporate pension plans they're all the same nobody has enough money to fund retirement so everybody is taking the maximum risk now in a rising equity market this kind of makes sense you're pouring back some of the ability to retire but if things change the picture gets a little bit worse you see the one bet people are taking is they're actually putting the maximum allocation in all of recorded history across the entire system into risk seeking equity like assets when equity valuations are off the charts you see when we look at the chart of the median price revenue of the sp500 we can see it's an all-time ridiculous record highs we couldn't use any measure I just use this chart because it's the most dramatic but we can use the P ratio it'll be the second most overvalued market in history the median P will be the most overvalued in history market cap to GDP the most overvalued in history we have an extraordinarily overvalued market now what's the worst thing about this is that there's a record over weight of equities nobody is owned this many equities or equity like instruments risk-seeking instruments ever before when the valuation is so high that is a dangerous setup you see the real problem here is it's all about the business cycle the business cycle as you know absent flows you can see on the chart here it goes up and down and it's relatively predictable within some boundaries but what happens is a peaking booming economy eventually gives way to a recession and they come along periodically every four to eight years now what's interesting about this expansion is this is the second equal longest expansion in all economic history and by next month or the month after this would be the second longest outright so what that tells you is there is a probability now that this expansion has to end at some point could it roll on for another couple of years two or three years of course it could could this end up being the longest ever expansion of course it can the point being is the clock is ticking and it's moving towards the next recession now normally that's no big deal this time it's a bit different you see in recessions the stock market generally crashes that's normal companies earn less money investors fear worse outcomes that are expected and the market sells off massively and over time it has had a tendency to recover well again that's a bit of a recency bias because all across Europe and other markets around the world things never did recover and why didn't they recover versus America and that's because the Americans have a cult of equity and the Europeans tend to have a cult of bonds so Europeans basically gave up in the equity market the structure of the pension system there means that they own much less equities there are about 70 or 80 percent in bonds for this particular cohort the Americans are the opposite they're about 70 percent in equity and equity like instruments they're taking huge amounts of risk now normally in America with this risk seeking culture once the equity market Falls the four k payments come in has everybody's income starts filtering into the stock market and acts as a break and helps the market rise the problem is is the next recession is going to cross the exact point that the maximum number of people are going into retirement this has never happened before anywhere what it means is that all of the life savings that are in equities which is basically 70% of the entire household balance sheet is going to get wiped out in one recession and they won't be able to buy back because they won't have an income to buy back this is the biggest problem I can see in the world today and nobody really understands that juxtaposition between the business cycle risk-taking and demographics it's this Nexus that makes me so concerned about what is going to happen to this baby boom generation and there somebody tells them about the risk that they are taking Wall Street doesn't want to tell them the asset management firms they want to tell them the TV companies don't want to tell them because everybody's cashing in on the same boom just look at the amount of advertising based around asset management and this industry it's terrifying to be pushing people in at this peak it's okay to trade and invest but if you are of retirement age you should be cautious if you are a millennial you should be the opposite of cautious you should be waiting for this opportunity so there's behavioral mindsets that need to take place but there's more to this you see demographics also tell us where the economy is going to go in the future and the reason being is that number of things are correlated demographics because people of a certain age generally act in a certain way that's not to say all generations and all the age groups act the same but overall a retiree will spend a lot less than somebody who was in the peak of their earning career I always use the example of my father when my father retired at 60 years old you know he was the kind of guy we were lucky enough to you know buy a new car every three years it was a fancy German car and he'd have nice wine in the house and got four dinners all the time cut forward to retirement suddenly he had this fixed investment pool that's what he had to live off he didn't know how long he was gonna live for and he didn't know what the cost of living was going to be so what does he do pull on the handbrake on his spending cut forward five six years suddenly I would say he's spending 60% less than he used to spend in a year now when you multiplied that out across the entire baby boom population you've got a dramatic economic event and there's no getting around that this is kind of baked in the cake let me show you some charts about how demographics tie into the economy the first chart is the unemployment rate versus the labor force participation rate now the labor force participation rate is key because it's really how many people are earning in the labor force to drive the economy now what's interesting is people have said oh look at this it's amazing the US economy is generating so many jobs well it's kind of odd the unemployment rate is low but the economy has not generated anything near the number of jobs that it has done in previous cycles why is that it's because people are opting out of the labor force so it's naturally driving down the unemployment rate because the labor pool is shrinking so it's a bit of an odd indicator this is exactly the reason why the Japanese have had an incredibly low unemployment rate over the entire time of their lackluster post demographic crash economy it's one of the reasons why the European unemployment rate has come back sharply it's because of the fact that people opt out of the labor force now in America it means that we should expect the labor force unemployment rate to fall and fall now that's interesting and many people say that's inflationary but it's not because of a number of people competing for those jobs or deciding to opt out anyway let's look at some more chance to build more of a picture as I talked about the thing I really fear the most in this whole equation is what happens to spending rates you see the spending rate the personal consumption rate basically follows your age group you spend in a predictable pattern yes I know we all think we're individuals but we're actually not we all basically do the same thing as people of our age give or take the parameters of which we earn and some of the other behavioral aspects but really speaking consumption is based on age and what happens is the older we get the less we begin to consume now also that may kind of make sense because you bought most of things you need you tend to buy larger big-ticket items holidays cars when you're older if you've still got that kind of income before you retire you see if you're a bit younger in peak earning you tend to buy more things for your house you know you might buy yourself a better bed coverings or a new bed or go to Ikea a bit more often you tend to buy yourself a few more luxuries you tend to spend a bit more in a supermarket and that's normal everybody does the same thing because you're at peak spending but when you get older you tend to buy less of those things you tend to buy more big-ticket items you know you might buy a nice car you might buy a nice holiday but you've got most of things you actually need you've accumulated them across your lifetime and your consumption goes down another fascinating charge you can see gasoline retail sales also exactly mirror the labor force participation rate now why the hell is that because basically the older you get the less you consume gasoline you drive less again I can use my parents for that they used to drive everywhere they live in Spain and they would drive across the country to go and see the place but the older they got the smaller their circle got and now basically they go to the local supermarket to the local bar to the local restaurant so then mileage goes down they just consume less gas they're not running around as much so interesting enough the whole of the petrochemical complex is tied to demographics I bet you didn't know that also monetarists talked about the velocity of money and it's a key indicator for inflation you know if money's moving around the system it tends to be more inflation it kind of gets around the system a lot more and creates inflation now the problem is is velocity of money is essentially a demographic phenomena the older people get the more they save and the less they spend and the money doesn't go around the system they're not reinvesting it in things they're not spending as much and like consumption it tends to fall over time so they're basically a function of each other and I think that's really important you can throw in the low interest rates into this they're all interconnected and tend to drag down velocity of money tend to drag down the labor force participation rate tend to drag down consumption now I want to give you something new to think about most people think about the Fed as this desperate attempt to keep the system as is and not let the banks go under and they didn't really understand why they were doing what they did now what happens if you look at the Fed balance sheet through the prism of demographics and it becomes entirely different basically the balance sheet almost exactly mirrors the labor force participation rate the Fed is taking the slack for the retirees and people leaving the labor force this is all they're doing they're trying to offset their now whether they a cognizant of doing this or not this is essentially what they're doing it's a fascinating and it makes total sense to me what I love about demographics is you can essentially extrapolate forward the demographics of a nation because it's baked in the cake when those people are born you kind of know when they're gonna die roughly what they're gonna do and how they can operate within the economy so Remy Tito and myself global macro investor put together a composite index of how to construct a participation rate using a number of different statistics now what's interesting is it mirrors the data pretty cleanly so it gives us a good idea of where we think this is going and then we can look forward and see where it goes and this is where things get ugly you see because of the demographics the labor force participation rate is about to fall off a cliff yes there's a bit of wiggle but 2018 2019 is we should see a collapse in labor force participation now obviously that kind of makes sense I told you that we're hitting that point where the retirement age and the average age of Americans are crossing so they're going to start this wall of retirement now that means that people are coming out of the labor force and that has a big knock-on effects that you need to be aware of now armed with our future labor force participation rate we can look with a fete balance sheets gonna go big red balance sheet here is inverted it's saying it's gonna go to 8 trillion dollars what's interesting is again how great this fit is and think of the prism I talked about the business cycle at some point soon we're gonna have a recession and soon meaning 1 2 3 years now what we know in the recession is we have no other outcomes except the Fed expanding their balance sheet we've not come up with another way of dealing with this yet yes there's gonna be fiscal stuff yes there's gonna be other untried measures but the Fed are going to expand whether we like it or not so this will leave us to expect a massive expansion in the balance sheet to come to offset this wave of retirees again what's interesting is a bit of economic history because Japan has an older population by 10 years so when we look at the BOJ balance sheet and look at the Fed balance sheet now as a percentage of GDP and put them against each other it's very clear where this is gonna go it's telling us we're gonna see an absolute explosion of the balance sheet as a percentage of GDP over time now I'm not going to get into the ramifications of that it's something we've discussed unreal vision a lot we kind of know it's coming and there's a number of ways it'll get dealt with but the point being is the demographics are pretty much died in the wall right now and if they've dyed-in-the-wool then we know where personal consumption is going personal consumption is going to unwind the great boom of the last 30 or 40 years where consumption became over 75% of the economy consumption is going to shrink as a percentage of the economy and consumption itself is going to go negative now that is something nobody is set up to understand can you imagine a world where consumption is that is the net take away from the economy and not the driver that's what we're setting up for this is something truly extraordinary now again go back to the big cycle to drive consumption further you can have to ram the millennial generation with enormous amounts of debt to drive consumption and offset some of this but they don't want to do that they're already saddled with debt from their education so they don't have the ability to do anything about this they also don't earn enough they're not offsetting the same amount of wealth as their parents there is a mismatch here so don't expect the Millennials to save the day there is a mismatch of a age gap it will come out eventually and I'll talk a bit about that in due course you see the equity market is also a function of demographics now the charts a bit noisier because equities are a much noisier instrument than most others because they're built on fear and greed almost more than any other asset class but equities should follow the Returns offered by the labor force participation rate an ageing population obviously needs to sell equities to realize income to retire and live off there is no way around that situation they will have to sell equities and they will sell as many equities as they can into the next recession because behaviorally they need to protect themselves they will become more risk-averse than any generation in history at that point when the recession comes and the market sells off it is just time to human behavior and that means that the returns on the ESPY are going to be somewhat problematic and not just a sell-off and a rally back afterwards but a more extended downturn in the future returns of equities and potential long-term compounding negative returns which is something many other countries with aging populations have seen but the u.s. is not seen it yet and doesn't believe it can happen if you think of all the things I've told you about consumption about gasoline sales I've told you about what's gonna happen to equities what that also means is inflation is almost impossible to generate it's impossible because people cannot consume enough the Millennials do not offset the largest spending generation of old history so what you get is a falling of inflation this is why I Medaille din the wool reflation estándar remain so and so something dramatic changes sure we could see the end of globalization and maybe that could change the structure but I think the slow decline in globalization is not going to do that so I fear that this incredible fits of inflation and the births as a sense of total population ie the aging of the population is going to hold true for a long time to come and that means people are wrongly allocated in it risk seeking assets versus bonds for example it just makes the world understand that fear in cash is not the worst thing you see CPI really is just a reflection of births as a percentage of the total population I either less people getting born the less inflation is going forward so that's the whole trend going forward and it says inflation is not coming back it's not something we should fear we shouldn't fear bonds yes there is some elements of inflation and we're not going to hide from the fact that inflation strangely calculated and that certain things have seen huge inflation such as rents and healthcare and other things have seen huge deflation such as the price of real vision but there's a number of things that balance that out and you've seen the Million prices project it tells you that broad inflation is not really there and it is driven by this phenomena of age and demographics so this is why this is the biggest story in the world we have the richest generation in all history by all measures but with the median person with no savings with too much risk taking investments way too many equities versus fixed income or any other investment and certainly over cash at the point in the business cycle that is getting mature and we're waiting for the next recession to roll along when that recession comes it's going to have equity prices or more this is the most overvalued stock market in history and therefore we should expect the price of equities to fall significantly that leaves a huge hole in the balance sheet of all of those people the biggest group on earth ever to retire they won't be able to buy equities to buy the dip then have gone the Gen Xers and Millennials can't afford to buy that death this is a huge risk to the largest generation of all time and it's something people need to be massively aware of you need to think really hard about the risks you're taking this late in the cycle I completely understand you might not have the money to be able to retire but it's better to have what little you have now than have half of this later it's something you really have to think about now many of you will think about well how are the government going to stop this and how are the federal reserve going to stop this and they will try because they have to and this is where some of the problems lie if you believe in free markets the right answer would be for that baby boom generation to pass their wealth on to their kids either of our inheritance or by transfer of assets and low price that the kids can buy so that's the accumulation of equities at lower prices that the baby boomers had in the 70s and 80s particularly in the early 80s when they really started buy equities peas were below ten eight seven six a lifetime opportunity the Millennials face for the same investing set right now have an all-time record of evaluated stock market an all-time record valuation bond market all-time overvalued real estate market they have nowhere to invest that has a positive rate of return over the next five or ten years it is a stupid point for them to invest what they need is lower prices and all of these the baby boomers should supply it in a free market but it's unlikely to happen the Federal Reserve would like to step in the way and increase the balance sheets I showed you they're likely to be buying stocks buying pension assets stopping those pension assets get plummeting now that means that the stock market gets supported the Fed start owning the equity market exactly as the Japanese have done but it means that the young generation can't buy them because they're too expensive what happens to the real estate market is that the clearing mechanism possibly or do the baby boomers and Millennials end up living together I think that's the most likely outcome that's what the pre-war generation did and that's maybe how this will all end up is we have larger households of more household members and I think that would make certain sense to society and would free up a bit of savings and would help counteract the loss of savings that the baby boomers are gonna have you see this is a really tricky world to navigate and I think you really all need to think hard and fast about what you're gonna do and the plans you have we're also financial market people so there are opportunities in this although it makes you feel a bit grim to say there's an opportunity and what I see is the biggest crisis a generation has ever faced in financial terms and it's not a bank crash it's a systemic loss of savings from everybody but there are opportunities because you see once you understand the world through a behavioral standpoint you understand that different people faced with different issues will behave differently and that means they will change how they spend we've already seen this in the restaurant sector as the baby boomers are moving towards retirement they're starting to spend less in restaurants restaurants have really struggled in recent years they've been firing people they have had less profits than they've seen for a while they've been in and out of recession we've seen it in a number of consumption areas within the economy that there is a problem as these people are starting to just finally save as much as they can before they go into retirement but it does mean they'll do certain things and I call this boomer Ville it's the world to understand when people retire you see go again back to that chart of the net worth of the median household they have fifty three thousand dollars in their house so are they supposed to sell a house that basically gets them to live for another year and a bit don't forget they wanted $45,000 a year the house only gives them 50 mm of equity so with this so few savings and this little cash what will they do well you see there's a different consumption pattern that's going to come and it's a slightly grim consumption pattern if you also think about why the middle of America was so pissed off is because they didn't participate in a lot of the final stages of what is going on the closer you are to that median person the further away you are from any boom and you see if we understand how those people live now the really neglected from society it is actually the leading indicator of many more people will need to go and that's sad it's going to increase probably populated with in the economy and certainly a bifurcation of politics even further than we've seen today because it's going to be tough on people dining is going to go towards fast food you know it's still sadly true that it's easier and cheaper to get food from McDonald's than it is to cook yourself that hits supermarket sales that hits a number of people particularly the restaurant industry but it keeps fast food sales ticking along nicely it's the cheapest way for the masses to afford to eat and that's not good for the overall health of the population it could actually reduce the life expectancy of the population too and continue to drive the obesity epidemic it's really not good now if you think about the $52,000 in the house well that basically gets you to buy a trailer park now trailer parks become very interesting for people because they can get rid of the debt around the house own the asset of a trailer park and release some cash so owning a trailer is a key thing now trailer parks I think are already high yielding investments you can get basically 18% returns and there's a listed trailer park business owned by Sam Zell that I think is interested and an interesting play here there's a number of ways of playing this downsizing of housing but it is an important feature that's to come and again it's less of the Mack mentions and the other things that we saw in 2007 it's just anybody trying to realize equity from their regular homes the other thing it cars nobody's ever gonna buy a new one again none of this generation will they will keep onto their car as long as possible we saw this a long time ago in Germany where you know average car turnovers were every three or four years people buy a new car it then moved to eight nine ten years it's my father you know that guy my dad hasn't changed his car for the last 15 years now that is gonna be very common the used car dealership market yeah that's okay it's not so bad but still not good because people are still not buyers many new cars there's a big problem the entire world is betting that China is going to take up the demand from the baby boomers I'm not so sure about that what we do know is the millennial generation currently is less interested by cars so they're more likely buyers of second-hand bangers than they are buying new cars they don't see the status symbol involved that older generations did but anyway the point here is the consumption pattern of of America and Europe is changing and it's going to change dramatically that's gonna change the investment philosophy and where you can hide in a stock market that's going to be under stress or where you can find real opportunities I do think that it is going to drive bond yields lower I think most of you know my my view on bonds unless something changes demographics will trump all the other thing we need to think about many of us watching real vision is we're part of the financial industry you see the financial industry was one of the biggest secular booms of all time it was driven by this baby boom generation when they took on debt it created an enormous amounts of opportunity and a swelling of the financial system when they invested in pensions and the 401k system was created it created an asset boom that spread that asset boom between those two building blocks went into the hedge fund industry they went into the private equity industry the venture capital industry the real estate industry everything we understand as the asset management industry was driven by these people and these people are going to take their money out that is an enormous change and the final return to trend for the economy and it's outsized financial industry we're all seeing it in the financial world we've all seen the banks shrinking we've also seen things like the robotize ation within the industry and the changes taking place we've seen the disruptors the vultures hanging around the system like Bitcoin you know aetherium picking at the carcass of the financial industry it's true it's change now it will adapt some of the smartest people in the world are in that industry they will adapt they will change fast looking how firms like Goldman are adapting their business model is breathtaking in its speed it's at startup speed change that they're doing stuff but there are other things that are going to happen to all of the people in the industry are gonna have to think how do I get the Millennial and how do I get them to invest their life savings now they're right they need to invest savings to save for their future but they were wrong and how they made it before they made false promises to a generation of which they couldn't keep this time around they get to wipe the state clean or they get to defer the blame on somebody else let's call it the Robo advisors it's not our fault the algorithm gave it to us this way so that's something we need to think about and the industry needs to manage that messaging unless it wants to get held to blame again some point down the future but the real opportunities may lie with the future of the financial industry again if you remember this millennial generation is faced with the all time record valuations equities bonds real estate private equity pretty much anywhere there is no opportunity for them to buy assets yes of course you buy gold that's cheap that some commodities are relatively cheap but commodities tend to be more cyclical than secular and that becomes somewhat of an issue when you're trying to build long-term wealth the right answer is for young people to build businesses the startup culture is exploding this is incredibly important this is the structure of the future economy if you can shift from a financial economy to an entrepreneurship based economy you'll build an agile nimble and developing economy that looks for opportunity and generate GDP growth it may not employ as many people that's fine because so many people are leaving the labor force so I'm really encouraged about the startup and entrepreneurship culture that's generating around the world and resonating everywhere from the Middle East to India from America to Berlin it's everywhere and I love that the other thing is the crypto space and the blockchain space now this is slightly contentious but is something I've been mulling in my head if you think about that problematic allocation to all of the other assets and you have something like a crypto currency or a set of crypto currencies or even I SEOs and I know most of them are complete scams but there are some that are good and the world will change and they will get regulated and there will be some amazing opportunities now if you said the future expected return from a crypto currency over the next 30 years is zero or a million and we're at let's use Bitcoin as the example we're about eight thousand seven half thousand well then as a millennial you're basically faced with the same fact set that you had in equities back in 1982 or in bonds back in 82 was inflation gonna be there forever or was the 18 percent returns you were given in bonds exceptional was the P of six meaning the cult of equity was dead or was there a long term opportunity in America and the global economy to revive itself I think crypto is here to stay the blockchain development will come I think the ico market will develop to be rich and deep and as large and as important as the equity market is now it'll be like the credit market it'll be an ancillary a big part of the financial market so if you're looking for the future and if you're looking for where the money will be in the future where life savings will go it's gonna be there over time now I'm no crypto bull right now but I can understand something with a risk reward that is attractive to somebody now who wants to create a saving for the future so I just want to leave you to think about all of the things I've said there's a lot to digest here and I'd really love your feedback on this topic because I think it's misunderstood but it is the single most important topic in the world today you

21 thoughts on “The Coming Retirement Crisis (w/ Raoul Pal)”

  1. A vast majority of people who live check to check are consumer zombies buying the latest car, phone, media, toys, going out to eat whenever they please, and upgrading houses every decade. B-but the gubbament will take care of me r-right?
    It's called live below your means and invest the rest. You'll be a multi millionaire by the time you retire, even in a low income job if you start in your 20's.

  2. I am a baby boomer and former money-center banker and investment manager. Raoul Pal is most credible in addressing capital market risks and the outlook for investment returns. I question two of his points: 1) whether deflation and 2) whether entrepreneurship. Raoul Pal attributes the 1970s inflation to material greed of baby boomers. Rather than attributing all to birth rates, I think the drivers of U.S. inflation were structural wage and price contracts with cost of living indexing, lagging demand following the 1960s robust economic expansion, unfunded costs of the Vietnam War, unfunded costs of the Great Society social welfare programs, and two OPEC oil shocks Global demand for the dollar grew as it achieved reserve currency stature ironically after being delinked from gold. Although my sense from monetary policy makers is that since 2008 their greater fear is deflation, I think that political interference is trying to talk the dollar down to make US manufacturing more globally competitive and increase labor utilization. Although the pendulum might be swinging from capital gains to relative labor gains, my sense is that labor has become an international commodity and that unions will not regain their membership anytime soon. So, U.S. consumers might suffer increased inflationary costs, but not participate in relative wage gains. As to entrepreneurship, necessity with drive some to venture their personal savings and energy and disruptive technologies will compel others to try entrepreneurship. But, financial illiteracy, the inherently greater risk of start up ventures, and the squeezing out of entrepreneurs by larger companies and capital pools will make entrepreneurship is hopeful, but less than compelling force for renewed U.S. economic growth.

  3. So! Pal worked for Goldman Sachs. Let's talk about how the US government bailed out his bank with tax payer money. The banks should have been allowed to fail. Now considering 60% of Americans have less than $1000 in their savings accounts speaks loudly. Either Americans are poor or don't trust the banks or both. I wouldn't place my savings in a bank, esp with the pathetic interest offered. Yet morgages are charged ursury compound interest rates. What about the false economy? Local and worldwide. The big reset is coming so be prepared.

  4. Bogleheads will explain the truth about retirement. You can live very comfortably on a lot less money.

    You are being fed a lie as usual.

    I know people how hit 50 retired with kids still in high school or below.

  5. What are the implications of this research on the FIRE movement? Does the movement help counteract the impact boomers will have because it encourages millennials to aggressively invest in the market? Or is the movement doomed because millions of people will have invested one third of their income in a market that will inevitably never rebound?

  6. Sell 50% now, wait for 3 years and buy at the bottom, average down and ride the next boom. What is the problem? Everyone should own MCD, KO, PM, JNJ, etc.

  7. Some of his charts are manipulated. He published this in 2018 and some of his charts end in 2016 to keep them from showing the run up of the equities market since 2016. And, he is either uneducated or disingenuous because he is not acknowledging that the 4% draw down trajectory still holds at any point. These glaring omissions make me suspicious of the veracity of the parts that I don't know about, too.

  8. too bad wages flatlined or went down, adjusted for inflation, in 1974.. .with OPEC, Honda, Nissan, toyoto, hundai, sony, Samsung, hitachi   "Dumping" their products on US shores for LESS THAN IT COST TO MAKE THEM???? to drive out the US mfg's (which they did) so that now the Asians are the ONLY market for many things. why pay an amerikan a LIVING WAGE (more than $8/hr… $9/hr- deductions is …~$7/hr?) and then 2/3 of that "take home" pay goes to rent. the rest of the paycheck goes for food/utilities with NOTHING left over but for a jalopy, car insurance? for a vehicle that goes to and from the house/work/store/house. cable TV or car insurance, cant have both.   ppl better get RV/trailer and put it in back yd for "retirement" in WM parking lots or wherever.  a decent tow vehicle, with biggest transmission cooler can get behind the grill and change tranny fluid every 15,000 miles… or LESS IF TOWING something substantial. .  I look at "hotel WM" every time I go there at night. the RICH and the   NOT rich… $250,000 RV's and ppl sleeping in their cars/vans/trucks/ little tow behind trailers.  ppl don't plan to fail, they FAIL TO PLAN.  hope for the best… PLAN FOR THE WORST!!!!!!!! for the bottom half? of americans Americas best days are behind us/them.   things are booming in china, plenty of jobs… 35 cents an hour? time to emigrate and hope for a better life? US reached or SURPASSED its optimum population of 235 million (1984) for ALL AMERICANS to have the AMERICAN way of life.  actually, I think it was 1974 with OPEC/stagflation/Unemployment… made in japan… china, india, Pakistan, Bangladesh as jobs flew/fly overseas as fast as korp amerika can send them there. hard to compete with ppl making 35 cents and hour and LIKING IT (better than starving to death). $1/hr is "minimum wage" in mexico? NAFTA was a fine idea… for korp amerika/investors in stock market.  CAFTA even better idea… for wall street and its investors… the top <25% of $$$$'d elite.

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