Q: What do you get when two of the smartest people in the room sit down for a discussion?
A: Serious investing insight.
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See for yourself why people are eating up this special one-on-one conversation between two of the smartest people in the room.
Below we’ve transcribed key excerpts from this webcast. Click here to watch the entire hour-long discussion.
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Neil Howe: Good afternoon. I’m Neil Howe. We’ve got a wonderful show prepared for you today. I’m joined by the one and only Raoul Pal. As many of you know, Raoul is the CEO and co-founder of Real Vision. He’s a Goldman Sachs alumnus and former hedge fund manager. Raoul, thank you for being here.
Raoul Pal: It’s great to be here, Neil. We finally get to meet. You’ve been on Real Vision a few times.
Howe: We have so much to cover. You’ve done a recent Real Vision series on the Retirement Crisis. I’ve talked about some of the same things. For this conversation, I’d like to go through the long-term fundamentals like population, employment and productivity. These are the long-term constraints on where the economy is going. From there, we can go to the business cycle, when is this expansion going to break? Then I’d look to move on to the financial cycle. And finally, my favorite topic, the political cycle.
So I’ll send it back to you to get us rolling.
Pal: Great. Thanks. This is a good framework because I look at the long-term, secular trends and then the shorter-term cyclical trends and how that impacts markets. Long-term, as I laid out in the retirement crisis video, we’re close to the end of a secular cycle in debt and equity ownership.
I think much of where we are today and the secular imbalances as being driven by this Baby Boomer population acting within rational thought. This was the largest generation of all time that had no offsetting generation so they walked into their first house, first car with incremental consumption that caused price dislocation. This caused inflation in the late 70s, early 80s. It was these generations starting to buy.
This next part of my cycle thesis is very influenced by your thinking. After this generation got into their 30s, they started saving for retirement because they were finally earning income. Around this time that was the advent of the 401k and the decline of the defined-benefit contribution system. The onus started to shift to the individual to save for retirement so money piled into the stock market. This accelerated with the advent of the index fund leading into 2000. The Baby Boomer generation created a huge speculative equity portfolio unprepared for a recession. As ever the recession comes along and wipes 50% out of the stock market.
Now, back then, Boomers were young enough to buy the dip but the mentality changed to ‘The equity market is not the safe bet I had from 1980 to 2000. This is something different.’
They then did the rational thing and said ‘How do I save for retirement now?’ The thinking went, ‘Well, property is relatively cheap’ and interest rates were so low so they piled into that. The madness of crowds exacerbated this dynamic and household debt exploded. That bubble burst and household debt has unwound partly.
Now we’re in a situation where this generation doesn’t invest in the stock market but the pension system does. That’s the last part of this demographic bubble. It’s the credit bubble in the U.S., where corporations issue debt to pension funds who are giving it to the savers and corporations use the proceeds to buy back their own shares. These pension fund managers are also taking excessive risk to close the funding hole made by those two recessions. All of these things have come together at a specific point.
Howe: That’s a great overview and before we get to the business cycle dynamics, I want to talk about the demographic constraints on the long-term. This is what I call the generation-long slowdown in the working age population. We’re in a period of incredible decline. We’re reaching absolute zero by 2021. It’s the consequence of Baby Boomers retiring.
Look around the world. You can see that the United States is not particularly bad but how about Russia, Europe, Japan and China, which shows the biggest delta. What’s driving it? It’s not longevity. It’s falling fertility. I’m curious to hear what you think of all this Raoul.
Pal: I think it’s no surprise that the Japanese stock market topped out in 1990. Europe topped out in 2000. Now we’re coming to the average Baby Boomer retiring in the U.S. I think that’s significant. Over time as the population changes, the growth rate to GDP falls alongside it. That’s why we’re seeing bond yields fall globally as well.
Click here to watch the entire hour-long discussion.