Michael Milken will celebrate his 60th birthday on July 4th. The former
“junk-bond king” is still going strong, having seen off prostate cancer, and
remains as controversial as ever. The debate over whether Mr Milken deserved his
jail term for manipulating the high-yield bond market he largely created rumbles
on nearly 20 years later, most recently during the Enron trial, where Mr
Milken’s genius was championed by none other than Kenneth Lay (as the saying
goes, with friends like that…).
Jeremy Siegel turned 60 last November. The Wharton business school economist,
whose book “Stocks for the Long Run” was the bulls’ bible during the last bubble,
is going strong too, trim and fit, with his mind as lively as ever—despite being
called “demented” at last weekend’s Berkshire Hathaway annual meeting by one of
the firm’s bosses, Charlie Munger. (“He’s a very nice guy,” retorted the other
boss, Warren Buffett.)
Mr Siegel and Mr Milken are among the first members of the post-war “baby boom”
generation to enter the decade of life in which most people retire. (Mr Siegel
puts the dates of America’s baby-boomers at 1946-64, which he says technically
makes him a pre-boomer.) Lately, both men have been giving considerable thought
to what impact the impending retirement of the baby-boomers will have on the
prices of financial assets. They have reached sharply different conclusions,
which they aired in a conference last month at the Milken Institute.
Having built his career on arguing that buying shares and holding them is the
best long-term investment strategy in almost any circumstances, Mr Siegel is now
surprisingly worried about the impact on asset prices of the demographic
time-bomb in the rich world represented by the baby-boomers’ mass retirement.
Many boomers have bought assets such as bonds and shares to fund their old age.
Arguably, these purchases have helped to drive up prices over the past couple of
decades. Now, he says, all else being equal, the sale of these assets will lead
to a sharp fall in prices, because there are too few people in the smaller
generations that followed the boomers to buy all of those assets at today’s
prices. For instance, in the developed world share prices could fall by as much
as 40-50% over the coming decades because of boomer selling, calculates Mr
Siegel. Unless they retire later, baby-boomers could see their standard of
living in retirement halved, relative to their final year of work.
Mr Siegel’s one great hope is that the shortfall of buyers of assets in the rich
world will be made up for by a surge in demand from the developing world, as it
gets richer fast thanks to the information revolution and globalisation. The
demographic time-bomb of a lot of rich-country boomers having to be supported in
their retirement by a smaller group of younger workers disappears when the huge,
far younger population of the developing world is added to the mix. Indeed, Mr
Siegel calculates that shares will continue to perform as well as they have in
the past—generating real returns of above six percentage points a year since
1802, according to the research that made his name—provided that the developing
world continues to grow strongly, and that buyers there are able to snap up all
the shares they want.
That would need to be a lot of shares, says Mr Siegel, who is writing a new book
on the subject, “The Global Solution”. By the middle of this century, he reckons,
most multinational companies would need to be owned by investors outside today’s
developed countries, he says, especially investors in Asia. The challenge is to
integrate global capital markets so that selling assets from the old in the rich
world to the young in developing countries is no harder, nor more unusual, than
today’s sales of assets by elderly folk in Florida to younger people in other
American states. From this perspective, America’s external deficits,
particularly with some developing countries, may be both long-lasting and
nothing to worry about.
The biggest danger is that growing protectionism in the rich world will both
slow the rate of growth in the developing world and prevent its demand for
shares being met. Mr Siegel views the recent opposition to purchases of American
firms by companies from China and Dubai as decidedly ominous.
Milken honey
Mr Milken, by contrast, is hugely optimistic, mainly because he thinks that many
boomers will live far longer than is expected today, thanks to existing medical
practice and spectacular advances, such as a cure for cancer, that he expects in
the near future. He thinks that average life expectancy could eventually reach
120 years. With good health at a far greater age, people will want to keep
working, not retire, he says—just as he and Mr Siegel do. (This prediction, Mr
Siegel notes, goes against the trend for rising average life expectancy to
coincide with falling retirement ages in the rich world.)
Undaunted, Mr Milken insists that working for longer will become easier thanks
to technological innovation, such as using the internet from home. That will
increase wealth, fuelling demand for assets. Hence the real issue for the world
over the coming decades, predicts Mr Milken, will be not whether there are
enough people to buy the assets of the baby-boomers, but whether there are
enough assets to buy, given all the extra demand in the world.
Most economists will tend to agree with Mr Siegel that Mr Milken’s forecast is
“more hope than reality”. But Mr Milken’s greatest achievements, from creating
the high-yield debt market to beating cancer, have been the result of his
refusal to accept conventional wisdom. Perhaps he will be proved right again.
And if not, there may be an ounce of good news among the bad. If politicians
realise that foreign buyers are needed to prop up the value of America’s
retirement savings, they may be less inclined to flirt with protectionism.
SOURCE:economist.com – http://www.economist.com/finance/displayStory.cfm?story_id=6914086