The Baby Boom and the Great Bull Market – Population Economics Revisited

The area of Population Economics has been around for some time now. Most people agree that our country's Baby Boom was a major driver of the economic prosperity of the late 20^th Century and early 21^st. I have always thought that this has explained nearly everything, but it gets little credit in the mainstream press. This weekend I sifted through some census data and put together a few charts and ideas. First, I tried to separate the population into three categories:

1. Assets – These people are revenue producing assets to our country and our markets. They earn the most, contribute great knowledge and financial capital, and supply some of the most productive labor. They are also generally healthy and not yet receiving money from our entitlement programs. I broke this group off into people aged 35 – 54.
2. Liabilities – As perverse as it may come off, these people are liabilities on our countries balance sheet. They drain money from social entitlement programs, remove capital from the financial markets, and are no longer revenue producing. They are individuals aged 55+.
3. Equity – These are Assets – Liabilities. They are the growth of our country – demographically speaking. They are Population Capital. They are the individuals getting education, beginning work, and preparing to be the revenue-producing assets of our country's future.

I then graphed the Population Equity of our country from 1960 to 2005 against the DJIA to see how it would look:

 

As you can see, the relationship is striking. Correlation does not necessarily mean causation as you can see this relationship did not hold from 1960 – 1980. But then again there wasn't the enormous Population Bubble that the Baby Boom was. Unlike the Dow, which turned around greatly Population Equity has continued its decline – and will continue for many years to come as the Baby Boomers become Liabilities and the Baby Bust become Assets.

Continuing to think in Financial Terms I decided to construct a term of leverage: The Population Debt/Equity Ratio. This is Liabilities over Equity. It would represent how much our country is borrowing against it's future. As in the financial world, higher leverage would mean creditors would demand higher interest rates – so I graphed this against 10 year Treasury Yields. The graph is below:

As you can see, this relationship has held up. Our population leverage peaked in the early 80's as did our Interest Rates. This has been what has helped fuel the relationship above as the leverage we took on in the 1980's paid off and our Population Equity turned into real Equity for our major corporations.

So what does this tell us about the future? If this is a valid relationship – which I believe is so, the apparent divergence that occurred between Population Equity and the markets must be explained. Also, what does this foretell about future interest rates – as many expect rates to remain low (I of course disagree). These are some questions that need to be answered and areas to be addressed.

1. What, if any impact does the global economy and outsourcing have on this relationship? China, India, Latin American, and Middle Eastern countries are undergoing population booms like we did – and their markets are hot. Does this mean that we benefit with them?
2. What impact does illegal immigration have on this relationship? Illegal immigrants have filled in for our dwindling Population Equity in the recent years. What will be the impact of tighter control of our borders?
3. What were domestic inflows into Corporate Equities during this time period and what will be the impact of outflows as the Boomers begin to withdraw from their retirement plans and shift their asset allocation from Equity to Fixed Income? Will this be enough to keep interest rates down? Has it already begun? Will foreign investment fill in?
4. What will the inevitable changing population leverage have on the Treasury's Aaa credit rating and default-free status? How will this affect equity markets as Treasury bonds are known as the "risk-free asset" in many pricing models?

I have just begun researching this area but so far it has been very interesting. Any comments or ideas would be great. I am a strong believer that Demographics can tell us everything and the more we look into this the more we may learn.

-β

Comments

[Bond investor]

ZB, try adjusting your graph for inflation. The *real* value of the debt in the population/debt ratio, and the *real* (not nominal) 10 yr yield will paint a much less "exciting" picture.