A huge investment bubble used to happen once every generation, says John Authers in the FT. But the last decade has seen both the internet bubble and the credit mania. According to Tim Bond of Barclays Capital, too many savings were chasing too few viable investment opportunities – a trend in turn underpinned by Western demographics.
Since stocks became mass-market savings vehicles in the 1950s, changes in stock valuations have become closely linked to the balance of savers in a given population, says Bond. In the US, for example, the 35-54-year-old bracket of baby-boomers rose from 24% of the overall population in 1989 to a peak of 30% in 2002. This drove share valuations (measured by the cyclically adjusted price/earnings ratio) up sharply in the 1990s, as the number of retirees selling equities shrank at the same time. There was a similar bubble in Japan in the 1980s, where demographic trends are “some ten years ahead of the West”.
Indeed, the unsustainable Asian investment boom of 1997-1998 was the first sign that the global pool of capital was bigger than the available productive investment opportunities, and the internet bust was the next sign. “Had the internet not existed, another vehicle for speculative fervour” would have been found. With a “superfluity of capital, societies will speculate on any asset”. Shocked by the equity crash of 2000-2001, and approaching retirement, the baby-boomers put their still-abundant savings into bonds, a tide reinforced by emerging markets’ burgeoning foreign-exchange reserves. A “voracious” global appetite to lend was the main cause of the “flood of capital into the debt markets” in 2003-2006.
But ageing populations suggest that the “era of capital abundance” is set to end, signalling fewer bubbles and busts in future, says Bond. The lower valuations implied by the falling proportion of boomers will be a headwind for equities over the next decade, although Bond reckons that solid earnings growth will ensure positive annual returns. But whatever happens to equities, bonds are a lousy bet in the next ten years. Ageing populations portend an “explosion” in public debt. And markets’ fear of unsustainable debt burdens being inflated away will send yields much higher, implying “negligible” returns.