Globally we’re at demographic crossroads where 1.1 billion baby boomers are exiting the workforce while 1.8 billion millennials, those aged between 22 and 37 according to Pew Research, are set to become the largest generation of consumers as they enter their peak earning years. In the US, the next year will see millennials overtake the baby boomers as the largest generational cohort, comprising 36% of the US population and 45% globally, according to research by Snapchat and Fundstrat.
Not only will corporate brands have to readjust to a new target audience but it marks the end of the captive audience that wealth managers, banks, hedge funds, pension planners, stockbrokers etc have built trillion dollar empires around in recent decades.
Since the 1980s the boomers and their wealth managers have bought every significant dip in the stock market providing a floor for the next rally to quickly rebound. Unlike the GFC and Dotcom crash in 2001, after the next crash there won’t be the army of bidders to lift the market to new highs and the downturn will be far longer, as the millennial generations have little loyalty to a market that has offered them little value in their lifetimes.
On the other hand, the crypto markets were created out of the GFC’s ruins by an open-source generation that has already caught the imaginations of young innovators, investors, entrepreneurs and millennial Wall St traders who are leaving prestigious firms to pursue careers in crypto.
According to research by Blockchain Capital, 27% of millennials think that Bitcoin is more trustworthy than big banks (9-year history vs 400-year) and more than 2 in 5 (42%) agree that it is likely most people will be using Bitcoin in the next 10 years. Yet, at the time, only 4% of those millennials surveyed actually held cryptocurrency. In the years ahead prices of digital assets will get picked up in a tailwind as the reality gap between people’s belief in crypto potential and those who actually own it closes .
Stock market ‘a missed opportunity’ for millennials
Along with the housing market, the majority of millennials have been priced out of the stock market rally and one of the longest economic cycles in history – “a missed opportunity because asset appreciation is unlikely to be as rapid in the near future”, the Federal Reserve of St Louis described it.
The asset rally since 2009, dubbed “the everything bubble”, has created enormous wealth but has driven stock, bond and real estate prices to all-time highs leaving millennials with few markets to invest with good upside potential. An illustration of how concentrated the wealth generation has been in the stock market rally, the wealthiest 10% of US households own 83% of all stocks.
This conflict is reflected by the limited millennial participation in the stock market and the low number of millennial homeowners globally. According to the Fed Reserve of St Louis, in the US three in five millennials (60%) lack stock market exposure and are on track to have less wealth than previous generations.
Through inheritance (from a generation before them who were renowned savers) and fortunate timing after the World War II the boomers were gifted an investing environment. When they first started vacuuming up stocks in the 1980s the cyclically-adjusted PE ratio (CAPE) was on average around 8. Today it is 33.
The crypto markets present millennials with the same opportunity to get in early, discover the FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks of the future and make the next digital financial boom their own while they’re in “the most important age range for economic activity”, as JP Morgan calls it.
The pension time bomb and the loss of social security
Traditionally, as people near retirement they allocate less to risky assets and more to bonds but baby boomers who were burnt in the 2007/8 property crash — when median wealth plummeted 44% between 2007-2010 — have been scrambling to make up for the shortfall in their retirement savings by piling into risky assets.
This has resulted in a huge equity bias in US households and the highest allocation to risky assets ever seen, doubled-up through investments in hedge funds, passive funds and even 401k pension plans. The average US household balance sheet has a 70% exposure to the stock market and risky assets, while in Europe it’s only 30%.
This year the largest wave of retirees in history will hit the US as the average age of the baby boomer crosses the average age of retirement (64) and will continue to pound economies globally for the next ten years. This mass retirement, plus longer life expectancy, is going to put huge strain on social security and it’s now a glaring reality that governments around the world don’t have the funds to pay out the life savings of all retirees. According to an analysis by the World Economic Forum (WEF), there was a combined retirement savings gap in excess of $70 trillion in 2015, spread between eight major economies.
According to the Transamerica Institute, 81% of US millennial workers are concerned that social security will not be there for them in future, and 51% expect to receive no benefit at all.
Who will be left to buy the next stock market crash?
This culmination of economic and demographic factors is set to exacerbate the next US/global stock market downturn as boomers who have ridden the wave of one of history’s longest bull runs are forced to sell their holdings into a downturn at any price to protect their life savings.
To drive prices back up to new highs and replace the largest spending generation in history, millennials would have to overextend and saddle themselves with debt. This is not likely to happen when they are still paying off debt from education. In the US, 75% of millennials have attended university.
Nor will the GenXers (the smaller and less wealthy cohort after the boomers) be in a position to pick up the slack as they will be planning for retirement and starting to de-risk.
“Among cohorts born after the baby boomers, the members of generation X stand out for having low incomes and wealth for a given set of demographics,” the Federal Reserve of Saint Louis describes GenXers.
For a glimpse into how this will play out in the US stock market we just have to look to Japan which was in the same predicament in the 90s, and how after years of a depressed stock market the country has now embraced cryptocurrencies as alternative investments and become the home of world’s most advanced crypto market.
After lost decades Japan turns to crypto
Japan’s economy has been in a state of deflation since the infamous asset bubble burst in 1992, right around the time the working age population peaked and started dropped off into mass retirement. For close to twenty-five years, Japan’s working age population has been declining on average 1% per while its elderly population has been growing.
Since its 1990 peak, Japan’s Nikkei stock market was in a downtrend virtually until 2009/2010, and even after the bull run since 2012 it has only recently retraced to a level last seen in 1997, a value just over half of its all-time peak. In contrast, Japan has been a leading light in cryptocurrency adoption (BTC/JPY is the most highly traded bitcoin/fiat pair) and has the world’s most liquid exchanges which have become prime takeover targets for listed financial firms.
With young investors’ confidence understandably destroyed in traditional capital markets after the “lost decades”, we shouldn’t be surprised to see Japan become such a hotbed for cryptocurrencies and it might just be a forerunner to what will happen in the US and other developed countries.
Comparing the current S&P 500 index (candle sticks) to the Nikkei of the 90s (red line) we can see an uncanny resemblance in trajectory. In fact, according to Nautilus Research, there is a 98% correlation in the analog (up until the shaded region) and only since April have we seen a real divergence in the two indices.
Chart of the 2-year run up to the 1990 Nikkei Index (red line) peak set against the current S&P 500 price (candles). Jesse Felder
The US is at a similar juncture in demographics and market prices as Japan was in 1990, so for millennial investors the stock market (currently at all-time highs by nearly all metrics) is a precarious place to be and, in future, the growth that we have seen this decade is not going to be repeated for many years to come – even absent an exogenous shock. Across the world, and particularly Asia, homeownership among those under 35 is at decades-long lows as property prices have reached multiples of the average income never seen before, creating social anxiety from China to London.
Property prices also out of reach
As with the US, so are the demographics in Europe, only the predicament of millennials there is even worse and has led to a resurgence of populist politics. In Italy and Greece, 29% of people age 20-34 are not employed, in school or in a training program, while the rate in Spain is 21%, and about half of Italians aged 25-34 live with their parents.
Homeownership among Americans under 35 is 34%, just over half the national average of 62%, which in itself is a five-decade low. Millennials are also far more likely to live with their parents than previous generations, with 15% of US 24-35 year olds now living at home. In the UK, a third of millennials will rent into retirement.
Why is this significant for digital assets and cryptocurrency markets in general?
With property prices at all-time highs and a speculator’s market, most millennials have also been priced out of the housing market which rules it out as an investment class. Until there is a big correction in house prices around the world, more will look to close the gap through entrepreneurship and smart investing.
Bitcoin was born out of the 2008 global financial crisis and the distrust of the corporate coterie of institutional banks, real estate and government that brought us to the brink and postponed the lives of many of the millennials just entering adulthood.
These impatient youths have lost time and money to make up for. In the foreseeable future the traditional methods of wealth generation – stocks, bonds and property – won’t have the same upside potential for them compared to digital assets, which so far (a bubble or not), have offered the best returns this century.