There are those who derive diminishing solace from the now disturb-
ingly ubiquitous Wall Street "paradigm" which boldly posits that this
bull market, with due deference to the fat lady, shall not end until
the baby boomers retire. Those no longer consoled by this proposition
because of its pervasive currency may take heart from a column in
the 24 February issue of USA TODAY entitled "Boomer Stock Theory
Just a Cruel Hoax?" written by David Henry. In his column, Henry
cites Ed Yardeni, chief economist at Morgan Grenfell, who has begun
to question his own 1988 research which led to the so-called "baby
boomer stock theory." That theory, in a nutshell, makes the case for
an ongoing bull market sustained by a powerful demographic bubble,
i.e., the 78 million post war American babies born between 1946 and
1964. Only when the first of these equity hungry baby boomers reach
retirement age, in A.D. 2008, and begin the process of stock liquid-
ation, so goes the theory, should the bull market slow or reverse its
ineluctable upward spiral. Based on this theory, Ed Yardeni correctly
predicted in 1990 that the DJIA would double to 5000. Following this,
Mr. Yardeni, referring again to the boomer theory, declared in 1995
that the DJIA would hit 10,000 by A.D. 2000. Now Mr. Yardeni,
according to Henry, is not so sure.
Apparently, Yardeni's 1988 research presupposed that the baby
boomers "would drive the savings rate in the U.S. to 10% of after
tax income." At that time, the savings rate was 5.5%. Instead, the
savings rate has defied Yardeni's model and fallen to less than 4%.
Indeed, allowing for involuntary savings accrued through life insur-
ance policies and employer pension contributions, Yardeni does not
think Americans are saving at all. He posits that the money flowing
into the stock market has been shifted from other assets such as bank
deposits, real estate partnerships, bonds, vacation homes, & 401 K's
(switched from defined benefit pension plans). Alas, mutual funds have
presumably become the new form of savings.
All this apparently worries both Ed Yardeni of Morgan Grenfell
and Ed Mc Kelvey, chief economist at Goldman Sachs, who has
for long described the baby boomer stock theory as "a cruel
hoax." Yardeni frets that "too many investors are depending on
it(the boomer theory) and may drive the market dangerously high."
If "stocks fall and stay down", he posits that boomers, the pre-
vailing theory notwithstanding, might sell. Should serious problems
develop for the market, triggered by Asia or the year 2000 glitch*
(dark clouds in Yardeni's meteorology), boomers "might sell en
masse" and "create a real nightmare."
*For an excellent treatment of the so called year 2000 problem,
please see the cover story for the 2 March issue of Business Week
which story is entitled "ZAP! How the Year 2000 Bug Will Hurt the
Economy (It's Worse Than We Think)".
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