Wharton School professor Jeremy J. Siegel became a superstar back in 1994 when his book, Stocks for the Long Run, showed how stocks beat out every other investment since the 1800s. Coming just as the 1990s stock boom was revving up, the analysis turned the finance professor into a guru of the buy-and-hold approach to investing. But even as he hit the lecture circuit back then, Siegel recalls, he began to be troubled by the outlook for the future over the very long run. People would come up to him after a talk and ask: "What happens when the baby boomers begin selling their stocks and other assets to fund their retirement?"
The question has been gnawing at Siegel ever since. Now he's tackling it head-on in a new book he expects to publish early next year. His conclusion: Boomers, and retirees across the industrialized world, are in for a rough ride over the next half-century unlike anything other generations have encountered over the past 200 years. The value of their accumulated assets -- not just their stocks but also their bonds, their homes, and even the government bonds that back up their Social Security and Medicare -- could plunge by up to 50% over the boomer generation's remaining life span. Why? Not enough buyers among smaller succeeding generations. "That's the horrible scenario, not where we are now but where we could be if we don't let foreigners buy our assets," says Siegel.
That, indeed, is his answer, and the title of his upcoming book, The Global Solution. Let retiring boomers in the U.S., Europe, and Japan sell their assets to the Chinese and Indians, whose younger populations and soaring economies will make them net buyers for decades. Of course, doing so would require a shift in mindset for Americans, many of whom already distrust globalization. For the solution to work, foreigners, as individuals and as companies, might have to buy a majority of Western countries' entire corporate sectors, Siegel says.
Equally wrenching, the same demographic trends could leave aging industrialized countries without enough workers to produce all the goods and services they will need. To Siegel, the global solution entails massive blue- and white-collar offshoring, dwarfing what the U.S. has seen in recent years.
It's an extreme scenario, but Siegel thinks the alternatives are even more unpalatable. If boomers don't sell to foreigners, their living standards will fall, he says. Alternatively, the U.S. could raise taxes on workers: Boomers would have to tax their children more to pay for Social Security and Medicare. Or boomers could work a lot longer. Retirement might be delayed a decade or so, to past 70, instead of today's average of 60.
Is all the gloom warranted? Critics like Robin Brooks, an economist at the International Monetary Fund (his views don't represent an official IMF position), say Siegel's model treats boomers as if they all will sell their assets to live on in retirement. One problem with the analysis, says Brooks, is that nearly 90% of stocks are held by the wealthiest 10% of Americans. Many can live off interest income and hold assets for their heirs. So the great sell-off may not happen, Brooks suggests, at least not to the extent Siegel fears.
Still, even the critics who don't buy Siegel's global solution think his basic concern is valid. A professorial type with a quick tongue and a ready wit, he likes to illustrate the boomer dilemma with the apocryphal chestnut about the broker who recommends a thinly traded speculative stock. A client buys in, the price climbs, so he snaps up more and keeps going as the stock soars. Finally he calls the broker and says he's ready to sell and collect his profits. Comes the reply: "Sell? Sell to whom? You're the only one who has been buying the stock."
Given all the assets boomers acquired during the 1990s bull market, someone has to buy if many do want to sell as they retire. Siegel sees the boom times in China and India as a fortunate trend that could save the day. Over the next five decades, he projects, their economies' share of world gross domestic product will nearly double, while the share of the industrialized West will shrink by half. This will happen not because growth in the West declines but because it will chug along slowly, in line with little or no population growth.
At the same time, incomes in China and India will take off, rising to nearly half of U.S. levels by 2050. The value of corporations in these regions will do likewise, Siegel predicts. Foreign investors, individual and corporate, will be flush with cash and ready to buy available assets.
Siegel debated this scenario with Michael Milken at a Los Angeles conference in April put on by the Milken Institute. The former junk-bond king argued that boomers are living longer and will also enjoy working longer, avoiding a massive liquidation. What's more, Siegel underestimated the potential of U.S. technology and entrepreneurialism. "With all this wealth, the problem is not who's going to buy assets, it's are there any assets to buy with all the liquidity [there will be] in the world," Milken said.
While neither spelled out the policy implications of his views, Milken clearly seemed concerned about creating the best environment for the U.S. economy to flourish. Siegel, by contrast, thinks the U.S. needs to integrate into other fast-growing regions. He'd love to be an optimist, he says, but from where he sits, the future of U.S. portfolios may be no match for their stellar performance in the past.
By Aaron Bernstein