Pirates of the Boomer Bust! (The Investor of the Future)

By: Daniel Amerman | Thu, Oct 26, 2006
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So, let's set up the situation. Most of the Boomers have already retired, and you are still working. Taxes are at a crushing level, as even partially keeping Social Security and Medicare promises are now consuming close to 25% of wage income. Federal income tax rates are on top of that and are also substantively higher, as the hidden subsidy from excess Social Security taxes is long gone, and now debts must be repaid. The government accounting shell game has moved on to its final stage, for the money to pay the principal and interest on the Treasury bonds that are the so-called assets of the Social Security Trust Fund has to come from somewhere - and that somewhere is you! State and local property, sales and income taxes have soared as well as the bills on expensive pensions and health care promises made to government employee retirees that have to be paid.

Yes, all the bills for all the myriad promises the Baby Boom made to itself are coming due, and all those public promises from long ago are being paid out of the same spot - your paycheck and wallet. With close to half being spent on taxes before you even get it, between the taxes for all the usual reasons and then the added Boomer costs on top of those. That makes it tough to pay the grocery bill, the mortgage, or the sky-high prices for gasoline, heating and air conditioning - let alone invest. A much lower percentage of the population invests than used to be the case. Who has the money after paying the taxes to support the Boomer's retirement needs? While the expensive remnants of the pension system still drag down legacy corporations and local governments alike, it has been many years since an ordinary employee has been able to participate in an old-style pension. The steady inflow of trillions of pension fund dollars coming in that used to buy investments and support the markets are long gone.

Sure, there are plenty of tax-deferred investment plans around, under more generous terms than your parents ever had, as the government desperately tries to support the investment markets, but there has been a loss of faith in those kinds of things. The Boomers bought regardless of price - with lucrative benefits to their own parents - because so many experts had promised them a shining El Dorado in the future. Those dreams had disappeared long ago in the slow-motion destruction of the Boomer's retirement investment plans, year after year, until few believed anymore - even as rock-bottom prices grew ever more attractive.

You shake your head as you think about the foolishness of what those Boomers did en masse, blindly following selected mathematical formulas from the past without ever stepping back to look at the bigger picture. The Boomers loaded down the public benefit system with promises to themselves until it groaned, threatening to break and take down the entire economy with it. Looking at what they had done, and doubting whether the generations behind them could come up with taxes to pay all that had been promised, the better off among the Boomers prudently saved for the future. Investing in the faith that all 50 million of them would be able to steadily and simultaneously sell their investments to buyers who would volunteer to pay prices exponentially higher than Boomers paid. Something that would require by far the largest real dollar cash inflows to the investment markets in history - but would have to be paid for with the money left over after these same people had been unable to pay for the mandatory public benefits? What were all those Boomers thinking?

You, however, do have a very well paying job, for you are one of the best and brightest. You can pay your staggering taxes, the expenses for your family, and still have money left over to invest. You are the exact sort of person that the Boomers counted on being there, to buy out their portfolios. You and the many millions of bright and talented people like you are the reason that the economy has not collapsed into a permanent depression, despite the simultaneous consumer spending declines and tax increases caused by the ongoing retirement of the Baby Boom (though there have been several quite nasty recessions along the way).

Perhaps most importantly -- unlike most of your peers, you have not lost faith in the investment markets, and you believe that the current depressed prices mean you will get some of the greatest long term returns in history. You love a bargain. You are trying to choose between two attractively priced investments. One is a three year old company, almost unknown, but with a foothold in the fast growing designer molecule manufacturing industry. The other is a legacy company, a global household name when you were still a child. Most of the companies from those days are long gone now of course, but this one has tenaciously hung in there and survived.

For the Boomers took their best corporate treasure galleons, loaded them so high with extravagant financial promises to themselves that the decks were barely above water, attached a flotilla of pension and health care promises to be dragged behind them, and then sent them off to sail on a multi-decade voyage into that sea of creative destruction known as capitalism. A sea where the future turned out to be like the past after all - unpredictable and full of storms. A sea increasingly populated by vast fleets of well-armed foreign pirates, growing speedier each year with the ruthless efficiencies of ever-increasing globalization. With more corsairs appearing each year, in the form of domestic start-ups where the innovative wealth creators decided to keep the profits from the ever increasing pace of new technology development to themselves, instead of obediently passing the treasure along to passive investors of previous generations. Veritable swarms of corsairs, each nimbly darting about, unencumbered by payments to Boomers, and pirating not only the customers -- but the best sailors from our legacy corporate fleet at every opportunity. Somehow survive the pirates and the corsairs, and then the Boomer treasure galleons still had to face the ghost ships. Their legacy competitors, sunk in bankruptcy court, but rising again from their watery graves, stripped mean and clean of all those expensive and inefficient promises to Boomer pensioners who had worked their lives there, or Boomer stock and bond investors who had invested their life savings. There were a lot of ghost ships, as they were hard to compete against once they got started in an industry, and were therefore quite efficient at reproducing themselves...

(Call the above paragraph naught but a nautical fancy if you like - but first take a good, long look at what has already been happening in the airline industry, and likely getting ready to happen in the next year or five with the auto industry.)

You look back and forth between the financial statements of the two companies. The legacy company is famous, cheap - and still overburdened with promises to the past, carrying the financial survival of too many retirees along with it. The senior management has been unusually skilled to stay afloat this long, but the company is surrounded by nimbler competitors, and these competitors are hiring away the best talent. You are tempted, for cash is once again king in the markets and the dividend is so much higher than the new company - but you've bought into future ghost ships before, and have no intention of being dragged down with the old folks. So you buy the modern company shares, you don't support the price of the legacy company, and one of the last of the surviving Boomer treasure galleons drops a little lower in the water...

The above is an excerpt from a free 57 page e-pamphlet titled: "Thinking Like A Buyer When The Boomers Are Selling". This pamphlet is one of the resources available at the website linked below. The Great Retirement Experiment is a series of pamphlets and books that are dedicated to taking a holistic and people-based look at the long term future of Boomer finances. Holistic meaning that the retirement investment sale experiment, the pension experiment, the consumer spending experiment, the Social Security experiment, and the Medicare experiment are all considered together, with the interconnections between these individually unprecedented experiments combining to form The Great Retirement Experiment. People-based in that the future is explored not based upon past investment returns, but by looking to the situations, motivations and self-interests of the buyers of the Boomers' investments, the younger generations who will be paying for all of the experiments. Call it Adam Smith meets the Boomer Bust.



Daniel Amerman

Author: Daniel Amerman

Daniel R. Amerman, CFA

Dan Amerman

Daniel R. Amerman is a financial futurist, author, speaker, and consultant with over 20 years of financial industry experience. He is a Chartered Financial Analyst (CFA), and holds MBA and BSBA degrees in Finance from the University of Missouri. He has spent seven years developing a large, unique and intertwined body of work, that is devoted to using the foundation principles of economics and finance to try to understand the retirement of the Baby Boom from the perspective of the people who will be paying for it.

Since 1990, Mr. Amerman has provided specialized quantitative consulting services to financial institutions, with a particular emphasis on structured finance. Previously, Mr. Amerman was vice president of an institutional investment bank, with responsibilities including research, synthetic securities, and capital market originations.

Two of Mr. Amerman's previous books on finance were published by major business publishers. "COLLATERALIZED MORTGAGE OBLIGATIONS, Unlock The Secrets Of Mortgage Derivatives", was published by McGraw-Hill in 1995. Mr. Amerman is also the author of "MORTGAGE SECURITIES: The High-Yield Alternative To CDs, The Low-Risk Alternative To Stocks", which was published by Probus Publishing (now a McGraw-Hill subsidiary) in 1993. Advertised by the publisher as a professional "bestseller" for four quarters, an Asian edition was sold as well.

Mr. Amerman has spoken at numerous professional seminars and conferences nationwide, for a variety of sponsors including New York University, the Institute for International Research, and many others. After the publication of his prior books, he acted as keynote speaker at a number of banking related conferences over the next several years.

This article contains the ideas and opinions of the author. It is a conceptual exploration of general economic principles, and how people may - or may not - interact in the future. As with any discussion of the future, there cannot be any absolute certainty. What this article does not contain is specific investment, legal or any other form of professional advice. If specific advice is needed, it should be sought from an appropriate professional. Any liability, responsibility or warranty for the results of the application of principles contained in the website, pamphlets, videos, books and other products, either directly or indirectly, are expressly disclaimed by the author.

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