Consumer Discretionary Spending and the Median Baby Boomer

Here is something astonishing that I saw in the IPO prospectus of a newly listed specialty retailer:

"[A]s 'baby boomers' age and begin to spend the income that they have saved during their time in the workforce, it is our belief that they will spend a disproportionate amount compared to the overall population on products that improve their comfort"

The problem with this theory is that the baby boomers have not saved any income to speak of. The wealth distribution is profoundly unequal, with only the top quintile in a position to plausibly consume any luxury goods being sold by the specialty retail chains. The other four-fifths will be hard pressed to afford basic necessities.

I was just reading an amazing paper, "The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble" [pdf]. Here is the reality:

If the median late baby boomer household took all of the wealth they had accumulated during their lifetime, they would still owe approximately 45 percent of the price of a typical house and have no other assets whatsoever. [...] More than 15 percent of the early baby boomers, people between the ages of 55 and 64, will need to bring money to a closing when they sell their home. These calculations imply that, as a result of the collapse of the housing bubble, millions of middle class homeowners still have little or no equity even after they have been homeowners for several decades.

The truth is that the present value of their social security and medicare benefits is the only asset that most baby boomers have:

[T]he baby boom generation for the most part has insufficient time remaining before retirement to accumulate substantial savings. Therefore, they will be largely dependent on social insurance programs to support them in retirement.

What you saw in the prospectus above is the consensus view about how baby boomers will be passing time in retirement. Not enough investors have actually looked at the median baby boomer balance sheet!

The baby boomers made a historic miscalculation. Besides not having enough children to support them, both in an individual basis and in the aggregate, as a result of their inflated home values, tens of millions of them families opted not to save during what would typically be their peak saving years!

Actually, even if the baby boomers had "saved" for retirement, it still would not be reasonable to expect them to be able to actually retire, given their failure to reproduce and therefore leave a plausible worker/retiree ratio. William Bernstein puts this succinctly in his article, Retirement Calculator From Hell:

Now that citizens are routinely living two decades longer, it is simply not mathematically possible, let alone politically feasible, to expect each worker to support 0.67 retirees, no matter how many coconuts, dollar bills, stock certificates, or Krugerrands they save up in the meantime.

If state and local governments think that they will easily raise taxes to fund public sector pensions, guess again. Raising taxes without resistance is a bull market, positive social mood phenomenon. The baby boomer lifestyle in retirement is going to be all about containing cost pressures: cutting (not clipping) coupons, fighting tax increases, and bringing chores and activities back into the household economy.

Besides being bearish for consumer discretionary spending, this is all ultra-bearish for residential real estate. What the housing bulls buying MTG and USG do not understand is that containing cost pressures is going to mean rising household sizes: children moving in with parents and vice versa.

Already there are properties in downtown Chicago or Phoenix where the rents do not cover taxes plus insurance. Right now the property values imply significant option value, for the prospect that rents rise enough someday to generate NOI. What if that never materializes? During past population collapses, prices of marginal real estate fell to zero.