The Wall Street Journal had an article on Monday that made the case for lower interest rates due to baby boomers transitioning their portfolios from stocks to bond as they get older.
The first time I ever heard about the boomer’s impact on capital markets was in 1989 when I was at Lehman Brother’s.
There are many reasons to be skeptical about the conclusion of lower rates despite the visibility for more demand. First is that many boomers will be influenced, one way or another, by the notion that bonds do not protect against inflation. Inflation has been trending lower for 20 years. It makes sense to think that inflation cold generally heat up some for some multi year period.
The average life expectancy in the US, I believe, is the mid to late 70’s. However the number goes up dramatically once you make it to 65 (anyone that has the actual data, please jump in). Then factor in medical breakthroughs that will prolong life, what if Michael Milken is correct and cancer ceases to be a cause of death by 2015? What would that do to the number?
Portfolios will need to create growth for 30 years. Bonds won’t do that job.
Perhaps most importantly is that, in my opinion, this effect is the type of thing that the market prices in ahead of time in such a way that the impact comes far short of what is expected.