The Baby Boom Bust Cycle


[Editor’s note: You are receiving this version of The Daily Reckoning Weekend Edition as part of your subscription to The Daily Reckoning Australia.]

First things first. Were you watching Sunrise at 7.30 am on Thursday? And did it seem like Kochie, the personal finance guru and TV host, did not know that the Greek currency is the Euro? Or that it used to be the Drachma? Maybe we misunderstood. But his co-host asked about the ‘Greek Dollar’, which was bad enough.

Even if the media is clueless, now that the Greek crisis is plastered all over the news and the Aussie markets have started pricing it in, it’s time for the Daily Reckoning to move on to other issues.

As people have aged , a ‘baby-boomer bulge’ has formed in most developed nations . Check out this ABS population pyramid. It isn’t looking very pyramid like…

You can play around with the metrics here if you’re interested in how things will look in the future. But be careful. The Australian population pyramid begins to take on a very suggestive shape around 2030.

Anyway, as the boomers have grown older, they have had some rather interesting side effects on asset markets. Namely, as this group has gone through its wealth building, investing and liquefying cycle, it has left a trail of destruction. The weight of their money flooding into whichever asset class is popular has created bubbles. Then, when it’s time to leave those asset classes, the bubbles burst spectacularly.

When the boomers were middle aged, the craze was the internet and its infinite possibilities. Brokers piled their clients’ money into tech stocks, heralding the age of computers and virtual companies. The whole thing collapsed in on itself when the tech boom turned out to be a tech bubble. The companies that were funded by the boomers’ hard- won savings turned out to be worth very little, if they even got off the ground. Of course, the whole thing went contagious and stock markets around the world were dragged down too.

People learned from their mistakes and moved on… into housing.

Supposedly much safer than stocks, this asset offered several advantages over imaginary technology companies. ‘Bricks and mortar’, ‘house prices always go up’ and ‘just take out the equity on your house’ became the investment mantras of the day. Governments, keen to secure votes, supported homeownership policies and thereby prices. Each time things looked shaky, the central banks would lower interest rates, directly impacting the asset class of the day – leveraged property. The boom in finance was one pleasant side effect of this for the whipper snappers of the day.

In the countries where policies to support homeownership were most drastic, prices increased the most. From setting up government- sponsored entities to buy mortgages, to creating tax benefits for increased leverage, the politicians came up with it all in an attempt to stay in political favour.

And just when things were looking good, the housing bubble popped. The asset class that investors had been piling into crashed – and continues to crash. Just when the lessons from the tech bubble were considered learned, the same fear, destruction of wealth and chaos ensued. It may seem like Australia and a select few have escaped this fate, but that’s unravelling as we write.

Now that savings have been wiped out a second time, or are in the process of being wiped out, what do all those people looking at retirement do? Most likely, they will go to the most liquid and safe assets they can find. That is, cash and sovereign bonds. As a Daily Reckoning reader, you might recognise that they are setting themselves up for a third disaster. Inflation and sovereign defaults are on the horizon.

Financial advisors’ models tell clients that the young should invest proportionally more in growth stocks, the middle aged should hold more balanced portfolios and the old should be in liquid positions, to ensure they have cash in retirement. As baby boomers have gone through this cycle, they have caused a boom and bust in each – and the third is developing now.

There are several aspects to this. First (and most obvious) is supply and demand. The cycle begins with a sudden increase in demand when Boomers discover their new favourite asset class. Because of the weight of money they represent, Boomers inflate an asset bubble with their buying power. But as the boomers moved from asset class to asset class during their lives, they had to sell up each time. Because of the bulge in demographics, the buying pressure wasn’t there to support the asset markets that were being abandoned. The bubble burst each time.

The obvious Australian version of this will be when baby boomers sell the stocks accumulated in their super funds. Who will provide the buying power to prop up prices? The whole system is set to be under severe strain, simply due to supply and demand.

But that is only part of the story. As we alluded to above, politicians and civil servants love to get in on the action too. In the US, this took the form of making the ‘American Dream’ an American reality. What they got was a nightmare. Massive mortgage companies were set up and backed by the government to create artificial demand for mortgages. Banks were required to lend to sub-prime borrowers by legislation. Central banks kept interest rates low. And homebuilders had a field day.

It all ended badly. Homeowners were left without homes, banks with bailouts and taxpayers footed the bill. Those still in the stock market relearned the lessons of the tech bubble.

The Australian experience with a housing bubble is still playing out, but carries many similarities. Negative gearing laws are an example of how politicians got involved. Australia even has one of the most developed securitisation markets in the world. As for stocks, capital gains tax benefits versus interest encourage speculation in the stock market. So any excuse that Australia is different is just asking to be proven wrong. And already has been when it comes to stocks.

Without government attempting to create prosperity for its biggest voting block, things would not have swung as wildly from boom to bust in the past two decades. The baby boomers would have retirement savings to fall back on. Instead though, it looks like the perfect storm is forming for a third time.

In response to the financial crisis, vast amounts of money have been printed and vast amounts of debt have been taken on by governments. Whether it was bailouts or stimulus doesn’t matter. This can end in two ways. Default, as seems likely for European nations – and inflation – as is more likely for the US. Australia, with its comparatively limited government debt, is more difficult to judge. It has its own more pressing issues in an unstable Chinese economy. There, inflation and government stimulus are still providing all the upsides and none of the hangover. That will change.

So inflation and/or default are what global investors can expect. Coincidentally, the two assets that the baby boomers will increasingly be moving into are cash and sovereign bonds. As always, contagion won’t leave the Australian investor outside the line of fire. But consider the implications for the Western world’s baby boomers as a whole. Three booms, three busts. Each in the baby boomers’ asset class choice of the day.

And it’s not like the booms funded productive investment either. Tech stocks, housing and government are no way to invest in a prosperous economy.

So if the Australian housing bubble is popping, implying we will follow the UK and US into a housing debacle, what should an Aussie do? Well, you can’t choose your age, but you can choose your company. It’s unlikely that Australia itself will experience inflation anytime soon, and we happen to have some remarkably high interest rates compared to our Western counterparts. So, term deposit rates are looking rather swell.

But hold your horses. The money monopolists at the Reserve Bank of Australia look like raising rates further. When they do, it will be time to strike. Just be careful you don’t pick a wobbly bank! We’ll ask Sound Money Sound Investments editor Greg Canavan to take a look into the best pick.

Nick Hubble
Daily Reckoning Australia Weekend

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.


  1. Speaking of wobbly banks, I have been with the ANZ for the last 15 years or so. About 8 or so years ago I noticed that they started to run two systems – an internet based one (all graphics and clicky buttons) and the old system which is just blue/white text on a black screen. The old system is what they use to do all the real banking, whilst the graphical one is at the moment only for rather mundane tasks.

    Now I am guessing that the new system was meant to replace the old one eventually but it has been an ongoing thing for the last – ohh 8 years. It also means that if you want a statement from over 12 months ago you have to put in a request and so on. Over the last couple of years we have all heard that NAB and recently the commonwealth have had some online banking issues and the like but ANZ has been going ok and I am putting that down to the fact that both of those banks have already upgraded and have had the inevitable teething problems. ANZ has yet to go through this and I am seriously wondering if I should tranfer all my stuff elsewhere because I reckong when they do decided to “upgrade” all hell is going to break loose.

  2. @Don

    I don’t think NAB’s recent issues were from a core banking systems upgrade. Yes, CBA went through the process of upgrading their core systems at a cost of 1.1 billion. About 300 million of that was for the actual software and hardware, and the remaining 800 million went to Accenture who brought expensive business suits and pointless meetings to the project. (Ralph *luvs* the suits)

    Back in the day when housing prices always went up, 1.1 billion didn’t seem like much, but today that is starting to look like real money. Money that ANZ probably don’t want to spend considering they just swallowed ING and are busily sacking every productive employee from that acquisition as fast as they can.

    So I think for now you are safe in ANZ. Your deposits are guaranteed by the Commonwealth anyway. I should say though, I recently opened an account with NAB and it has been fantastic. Yes there were a couple of outages, but I don’t use it for my daily transactions yet as I am still in the process of leaving HSBC, who used to be great, but now … well, lets just say, not so great.

  3. First things first. Were you watching Sunrise at 7.30 am on Thursday? And did it seem like Kochie, the personal finance guru and TV host, did not know that the Greek currency is the Euro? Or that it used to be the Drachma? Maybe we misunderstood. But his co-host asked about the ‘Greek Dollar’, which was bad enough.

    Anyone that thinks that Kochie is anything but a simpleton presenter for simpleton TV watched by simpleton’s (and I include the author of this commentary in that description for having no shame in being prepared to admit they watch the program). That the Herald Sun has a special once a week special on Hochie and his wife’s financial advise makes me laugh almost cry at the stupidity of some people, lots of people.

    Your example here of his lack of prerequisite skills to qualify him for the accolade as ‘financial expert’ is typical. It has bothered me for some time how ill informed or uninformed the man is but shamefully he fits in well with his peers. I do not source my news from Channel 10, Channel 7, or Channel 9 as they are not interested in the details just the headlines. Oh, and what ever latest tit bit of you tube video they can find that they think their brainless audience wants to see, again, and again.

  4. Don,

    The NAB is still running its core banking applications which are based on 70’s design. It still runs a batch window from 9pm to 6am. It still runs a day book and operates a ‘hold over’ log of all real time transactions to provide real time balances. All the banks are trying to buy better ‘real time’ systems. The problems they are experiencing are:

    1.) Lack of functional coverage (they don’t do all that the old systems do even if they do more of what the bank wants to be able to do in the future).

    2.) Integration. The old systems have been maintained badly over decades. The budgets for change have always been tight and so coding standards and testing standards have declined proportionately.

    3.) Resourcing. Having seen I.T people as an expense to be avoided at all costs the management have lost the real experts that they depended on. To cover this off-shoring resources have been brought in which offer less value in an I.T sense than the lesser experienced staff they retained. Bank management seem to believe that they represent the fundamental bank and that their assets are the branch network. They forget that most people visit a branch rarely. They interface with the computer systems which really do run the bank and fundamentally represent the bank. Break this (your I.T and data system) and you have no bank as the NAB discovered late last year. All the GUI stuff you see via your banks Web Portals are just a presentation layer. The money work is done on a very efficient very fast mainframe computer using a coding language which around 50 years old.

    Nab Insider
    June 21, 2011
  5. Wow Nick, that is a great find on the ABS website:

    For anyone playing around with the widget, try this:

    1) Take the slider back to 1980.
    2) Now see the big hump? That is the start of the boomers at 33yrs old. Keep your eye on that and move the slider until that hump hits roughly 65yrs old.
    3) What year do you see on the slider?

    “The obvious Australian version of this will be when baby boomers sell the stocks accumulated in their super funds. Who will provide the buying power to prop up prices? The whole system is set to be under severe strain, simply due to supply and demand.”

    Definitely agree.

    I am truly beginning to think that this whole idea of ‘funded retirement’ is a big problem. It worked in the past when we had a large population to support the retirees. Now we will have a large and struggling population trying to support a large volume of retirees.

    Something’s gotta give. Either the retirement age goes up, or the standard of retirement goes down. Or retirement is abolished altogether.

    When retirement was first introduced in Germany by Otto von Bismarck, the general idea was to put the age so high that most people didn’t reach it anyway. Now we’ve reached that age easily due to increased life expectancy, but don’t bother to increase it much.

    I think it will be forcibly increased, again and again. In 30yrs time it will probably be retirement age of 80.

    And here’s a backwards story to wrap up: a colleague recently retired at age 55. Why 55? Because the pension/superannuation scheme he was on offered more incentive to retire at 55 than to retire at 65, as he would earn more money that way. Earn more money doing nothing? Yes.

    A perfect example of the type of retirement options future generations will not get.

  6. I forgot to mention that some boomers and even generations after them are planning to use their Superannuation to pay off their mortgages.

    Whilst this is good for the individual, what is left of their superannuation? Nothing? So the pension system gets burdened even more.

    The whole idea of superannuation is to fund retirement so that pensions are not relied upon. If people go and spend all their superannuation on property, then the Govt has a direct connection between property prices and their own pension liabilities.

    Ie, higher house prices = more pension liabilities.

    Nice one Rudd! Propping up the housing bubble has yet another negative unforeseen consequence. Govt’s should stop meddling with the damned economy already, it is getting out of control.

  7. Pete, three words.


  8. Buy.Gold.Now.

    Oh wait…tick

  9. Nice 1 Lachlan. Im in silver myself, but I think I will convert to gold.

    The point that Nial Ferguson makes in ‘The Ascent of Money’ is that assets have never been nearly as important as income, so by all means, swap your useless paper for PMs but make sure you have an income.

  10. Comment by Lachlan on 22 June 2011:


    Oh wait…tick

    Comment by X on 22 June 2011:

    Nice 1 Lachlan. Im in silver myself, but I think I will convert to gold.

    Hedge your bets and have exposure to both..
    Short term Silver could again outperform Gold
    I have physical silver and leveraged into gold through gold miners, some bigger players and some smaller players.

    Comment by X on 22 June 2011:

    The point that Nial Ferguson makes in ‘The Ascent of Money’ is that assets have never been nearly as important as income, so by all means, swap your useless paper for PMs but make sure you have an income.

    Have never read it X, but from my earliest posts to DRA I have always said income is the most important.

    It is income that funds your lifestyle. My aim is to have an income stream set up that is consistently level with my current salary and then I hope to retire.
    Yes, I could keep working and have the investment income and have more money, my goal is to not have to work anymore by necessity. The recent business ventures are another step towards that goal. One is as a financial partner, the other we intend to build the baseline of the business and then turn it over, hopefully for a reasonable profit. If our expectations of a sale look like not being met we will hold it until such time as it does. I am working 80+ hours a week at the moment, yet to take a cent in renumeration from the business. Is why I have not been around much.

    June 25, 2011

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to