The Big Picture
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The following is excerpted from the November 26 edition of “Breakfast with Dave,” a publication from the Canadian research firm Gluskin Sheff:
We remain in the throes of a secular era of disinflation. We are also in a long-term period of sub-par economic growth and below-average returns. That has become so well entrenched that US pension plans now have more exposure to bonds than to stocks, as we highlighted two weeks ago. Look, this is not about being bearish, bullish or agnostic. It’s about being realistic and understanding that in our role as market economists, it is necessary to provide our clients with information and analysis that will help them to navigate the portfolio through these stressful times. Our crystal ball says to stick with what works in an uncertain financial and economic climate – in other words, maintain a defensive and income-oriented investment strategy.
It is our contention that in this post-bubble, mean-reverting process, the ability for policymakers to re-create the credit cycle, relate asset values and ignite a consumer-led recovery is going to be thwarted by secular changes in attitudes toward borrowing, saving, discretionary spending and homeownership. In other words, even after enough debt is paid off, the baby boomers’ spending years will be focused on putting their money in the coffee can. The first of the boomers are now turning 65 and the median boomer is now 55, going on 56. At the margin, they will now be forced to plan for retirement by setting aside an even-greater part of their paychecks as opposed to relying on the perceived level of their future net worth, which had become the norm over the past two decades as inflated asset values, first in equities and then in residential real estate, triggered unrealistic expectations of the intrinsic value and capital gains potential of their asset base – an asset base concentrated in inherently unproductive items such as the house.