How Unfunded Pensions Will Destroy Your Retirement (w/ Raoul Pal)

RAOUL PAL: Hi, I’m Raoul Pal, the CEO, and
co-founder of Real Vision. I’m here in the Cayman Islands, representing
myself as Raoul Pal, CEO and co-founder of Global Macro Investor, my research business. Actually, it’s more than that. I’m here to go on a personal journey with
you. This whole two weeks of content, as you saw
from the introduction video, is really important to me. I think it’s the single most important topic
that I could ever help anybody with. Sure, I can help people in investing, trying
to make more money. The reality is, there’s something more basic,
why do we invest? We invest for a reason, which is to give ourselves
the chance to have a better future. That’s what it’s all about. Saving for retirement, or for a different
life. You see, I’ve been passionate about this story
of demographics, and the effects that it’s had on everything that we understand to be
the financial markets, and the potential effects as that demographic wave of baby boomers starts
leaving the workforce. I’m also worried about how people allocate
money when they’re getting too close to retirement age. You see, I think I explained in the first
video I ever did on this two years ago, the one that reached, I don’t know, 2 million
people, the most shared video in the history of Real Vision, and the most commented on,
was the fact that I saw it firsthand with my father, and some friends of mine who were
a bit older, who had retired young. You see, my father retired basically at the
2000 recession, and wiped out a whole bunch of his pension assets. He has mis-sold complex products that he lost
fortunes on. He then hit out in the bond market where possible,
and I tried to help him through. As you got into the unexpected consequences
of the second wave of financial defaults that came in 2008, it became even more sinister. You see his bonds, which were 10-year bonds,
had essentially rolled over in 2010, the ones that I’ve put him into. Great, he had bund yields at 4.6% and everything
was fine, but they were 10-year bunds, then it came to roll them over and the interest
rate was essentially zero. That meant he had no income left, that he
had to eat into his capital. The shock that that had to him was huge. He was a man of great pride, an Indian with
a lot of pride and for him, to have to face the consequences of your savings, he had a
very good career. Not being enough was something he didn’t really
want to face. One of the things, obviously, he did as almost
every person who goes in retirement is they stop crimping expenditure, and he must have
lowered his expenditure by 60% or 70% over the years. He passed away last year, my mom’s still alive,
still living in Spain, and it’s easier for one person to manage and there’s enough assets
for her to go on through, and I’m obviously there to help out. Just seeing it firsthand, another friend of
mine retired young. He got hit by 2000. He lost 50% of his retirement savings, never
recovered. That’s been the story that I’ve seen time
and time again. The problem is here, as I talked about in
the first retirement video, we’ve got 76 million baby boomers, on average, 65 years old this
year or last year, in fact. Everybody is stepping into retirement phase. They all have their dreams. You see the glossy brochures, skipping along
with your wife or husband on the beach in Florida in your nice linen shirts, suntanned
and happy and gray head, but that’s bullshit. It’s never going to happen. Not for most people, maybe for the 1%. You see, the baby boomers created their wealth,
the most disproportionate wealth in all recorded history, and they’re probably going to destroy
it too. It’s not their fault. They didn’t know. They’re just doing what they were trying to
do. They were trying to save for retirement and
then they were trying to cash in for their retirement. You see, here is the problem. There was 76 million people born between–
that’s in the US alone, born between 1946 and 1964. The fabled baby boom generation. Didn’t really matter in those first years,
but by 1979, the first of them started getting through into the workforce. When the maximum number of baby boomers were
jamming into the workforce at the same time, those very people were the first buyers of
tables, chairs, suits, ties, cars, houses, lamps, everything. They bought everything from scratch. There was no offsetting generation to sell
them to, because so many people had died from the two world wars. They were it. They were everything. They were the saviors of our world, that special
generation, the baby boomers, and that behavior pattern of spending was normal. They were all coming into their 20s and 30s,
getting their first job, they drove up inflation. If you look at this chart, you can see where
the boomers first started coming to work, and the dramatic inflation that they created. Then after that, inflation started falling. Part of that was the Federal Reserve, part
of it was just a natural, less of initial purchasing that these people went through. Yes, included in that was coming off the gold
standard and the implication from that. Yes, included in that was a bunch of other
factors like the oil crisis, but at core, it was a demographic issue. If you think to yourself, what do you do when
you’re in your 30s? You start thinking, oh, shit, I better start
planning for retirement. I start to need to think about my pension. This was the rise of the pension system. From that moment, from about the 1980s, the
pension system started to really take hold. Corporations were giving out big pension benefits
with defined benefits, too. Meaning they promised you 60% of your final
retirement income at retirement age. That seemed an amazing thing. I could pretty much have the same lifestyle
I have now and never work again. That was the promise. The reality, we’ll talk about later, was nothing
like that. You see, what that did, all of those savings
from those people who’ve now had their kids, bought their old first stuff, they had excess
savings. That excess savings started dwindling and
the savings rates of America started to decline. Those savings went into the stock market,
first by the corporate pension plans, and then the advent of the 401k and the rise of
indexation. What that did was create one of the largest
equity booms the world has ever seen. By the time we got to 2000, we’re in the midst
of a huge bubble. As all the baby boomers hopes and dreams of
future retirement and all the wealth they could create was in that stock market bubble,
the future of technology and the amazingness of it all. Everything got dashed on the rocks as the
markets collapsed, and those valuations stood not to test the time and many stocks never
recovered and went to the wall, many frauds were uncovered. People lost a lot of money. Now, anybody I know who was very well invested
in then generally started to get a little bit cynical about equity market investing. You see, the media have been cheering them
on, buy this, buy this, you’ve got to do everything. The banking industry cheering them on, more,
more, more. They were taking risks they didn’t understand. Then the stock market collapsed. These baby boomers now, and this was some
20 years ago, were average age of 45. The first of them started retire at the age
of 55, the early retirees, and that was I think one of the factors that spilled over
into the equity market crash of 2000. Collectively, they thought, huh, we need to
do something else with our retirement savings. We need to do something that’s a bit more
secure, something I can’t lose money in, something that will protect me to retirement. Property. Bit by bit, after the Federal Reserve had
cut interest rates massively to offset the equity bust, and considering the wave of demographics,
it meant that deflation as debts was still piling up, deflation was coming as a persistent
force and lowering interest rates over time due to these retirees, but the property market
took off massively. This was now everybody’s hopes and dreams. The stories of the stripper in Vegas with
five houses as told in The Big Short, that was real. These are real people, real things happen. We all know somebody who eventually succumbed
to the greed of the housing market and then the Federal Reserve started raising rates
and slowing things down, as they always have to. The party must end at some point. When it does, the housing market collapsed
and destroyed the entire world’s banking system with it. The orgy of household debt was almost unprecedented. It wasn’t just household debt, it was everything. The government was piling on debt, the corporations
were piling on debt. Everybody in the financial system obviously
have piled on debt. Everybody had debts upon debt upon debts. That is what started rocking the financial
system, and is still rocking the financial system across the world, particularly in Europe,
where those debts are dwelling and lingering and festering, those debts are still real. The household balance sheet improved somewhat,
but not entirely. Now, the baby boomers in their second half
of life, had had two crises. Two crises start to really affect you. They start to affect your behavior and then
started the bubble of central banking. You see, the central banks have become omnipotent,
they think they can solve everything by pumping liquidity into the system and cutting rates. Even though rates across the world is zero
and even negative, they still think they can use the same medicine to continue. Maybe they can for now, but the point being
is that bubble in central banking has left other issues behind. One of the key issues is the velocity of money
has collapsed. Money’s stuck in the banking system, it’s
hoarded, it’s not spent. It’s used as reserves because the banking
system is scarred and regulated. There’s no way for it to solve its problems. It is going to keep all the cash it can. That means money doesn’t move around. That’s lowered the rate of GDP growth. GDP growth in this, we can’t call it a boom,
but this upcycle since the previous recession is the lowest in all recorded history. The Federal Reserve used the one trick it
really had, its newly learned trick from 2008, the balance sheet. The bubble in the balance sheet exploded,
and the Fed became the liquidity provided to everybody. That balance sheet grew at ridiculous levels. The reality of it, it was there to offset
the baby boomers. That’s the little understood part. It may be not explicit by the Federal Reserve,
but it is implicit. If you look at the chart of the Fed balance
sheet, inverted here, versus the labor force participation rate, either the number of people
in the labor force, the percentage of people in the labor force, you can see that they’re
very, very correlated. As you know, that labor force participation
rate is forecastable in the future. We’re talking demographics here. If that’s the case, then it looks like the
Fed’s balance sheet is going to go to $8 trillion. It’s a chart that shocked many people when
I showed it before, we’re now exactly at the point that the balance sheet should be expanding. Lo and behold, it’s playing out perfectly
to plan. The next part of this bubble phase driven
by the baby boomers is, oh shit, we can’t save enough money so what we must do is take
as much equity risk is possible again, because we’re in our retirement years, we must go,
go, go, go. That’s the message that’s come from the asset
management industry, from the banks, from the brokerage houses, from the media. What happened was another neat little trick,
Wall Street said with a little sleight of hand is we’ll just cut your fees. Now, it’s almost free to buy equities. Well, A, there’s no such thing as a free lunch. Secondly, that passive indexation cause another
bubble. Everybody pulled their money into the lowest
cost thing to hopefully increase their returns in the end. They were in a race against time. They’ve got 10 years, 15 years to retirement,
they’ve got to find the best return so they pulled back into equities again, generally
not at household level, but by pension fund level. Your pension fund took this risk for you. Most of you guys didn’t want to take that
risk, but your pensions did. They went into passive strategies. What you did was create this enormous bubble
in these momentum stocks. If you think of value versus growth, this
chart here shows us the most extreme levels in all recorded history. That, again, is the baby boomer capital sloshing
around through very small doors into places it should never be. Another bubble happened at the same time. After the 2008, the next bubble took off. That was the bubble of corporate debt. You see, corporates had cashflow, unlike households
that were nervous about it, corporate said retire, they didn’t need the money for now. Then there was this nice neat little tax trick,
which was I can issue myself stock options. Then issue a bunch of debt, record low interest
rates. I’m borrowing money, and I’m going to buy
back my shares. What that did was drove up the share prices,
because there was less shares available and there’s a big bar in town, made the management
super rich because they had stock options, but it created the largest corporate debt
bubble in all of history. US corporate debts are now all-time highs
as a percentage of GDP. I’ve discussed this before, how this doom
loop of corporate debt could get ignited, and it’s probably the end of this next cycle. It’s something that everybody is invested
in. Your pension fund basically has two core assets
here. You have equities at all-time record valuations
ported into this small sector of indexation and passive flows, where valuation doesn’t
count, and credit at all-time record lows where valuation doesn’t count. It’s all herd mentality. It’s the same as the property market in 2008
and it’s the same as the stock market in 2000. This time, you’re not making that choice or
your parents aren’t making that choice. It’s being made for you by somebody else,
being irresponsible with your capital and your future retirement. That combination of those passive flows and
those corporate buybacks were interesting, because everybody else, scarred and disenchanted,
has left the market. Baby boomers have been selling as they should
do as they go to retirement. Households have been divesting themselves
of assets, but pretty much everybody. Even the pension system has been dubbed by
divesting of assets, but buying a lot of corporate credits at ridiculous levels, but the equity
markets still took off. It was not on rampant speculation. It was on rampant pension flows, driven by
the baby boomers in the index funds, skewing the returns of the S&P and largest stocks
like never before, but also those corporate buybacks, that Pavlovian issue shares, make
myself money, buy back my debt, looks good on my earnings numbers. That ridiculous situation pushed up equities
further and further into that spectacular bubble we’re seeing now. How can it not be a bubble when Apple, truly
great company, tax on $350 billion in market share in two months? This is simply ludicrous. The ludicrousness of Apple, Amazon, Microsoft
and Google being larger than the stock market of Germany, second or third only to the US,
Japan. This is madness. These are great companies but at what price? That’s your retirement savings, or your parents’
retirement savings that is creating that price. It’s a false price. Again, that’s not a judgment on the companies. They’re all amazing, but they are cyclical. Microsoft, it’s a business services provider
and software provider. Google, it’s basically advertising. Amazon, purchases consumer goods. These things are really important to understand. They’re not bulletproof, but the market and
the pensions industry is doing it because it’s given all responsibility to the index. It is now not my choice. The index drives these, not me. I didn’t buy them. I bought the index. This is the dangerous territory, the one that
Mike Green has been warning and warning about saying that this is ridiculous. It can go on further, but what is going on
is something truly concerning for all. Even worse, is this a bubble in volatility
selling of all things? We didn’t learn the lesson when volatility
blew up in February 2018, on my birthday, in fact, two years ago today is it blew up
because the pension system, still not getting enough yield for those promises, there’s broken
dreams that they’ve given everybody, starts selling volatility as an asset class because
they can pick up excess returns. Well, that’s all well and good, but anybody
who’s traded volatility for as long as I have, knows that it completely can fuck you up if
it goes wrong. Being short volatility was being like short
Tesla stock in the last few weeks. When it goes vertical, it’s unviable, it becomes
a huge structural problem. It also dampen the volatility of markets and
I’ve been saying for a very long time, and maybe who knows me from Real Vision or Global
Macro Investor is that suppressed volatility always and every time eventually leads to
hyper volatility. That’s the potential outcome for this volatility
short selling bubble. As I’ve mentioned before when I talked about
corporate debt, we’ve got the corporate bond bubble. Junk bond yields are at all-time record lows. There’s in fact, no risk offset in the margin
for junk bonds. There is literally no action excess premium
in the BBB market that is on a precipice of being downgraded. There is no margin to account for any rising
defaults when they arise, and they will arise. They always arise in the next recession. It’s priced to perfection with your retirement
income. You’re hiding out in the lowest available
yield, because you’re desperate to get the returns or your pension manager’s desperate
to get the returns that they promised you in those shiny newspaper articles. Those ones that are elusive and never exist. You can be on that white sand beach in Florida,
skipping along in your pink linen shirt. That’s not the reality of the situation at
all, and people need to come clean about it. You see I caught the real issue here is that
bond yields are driven by population. If you look at this chart, this chart is the
color chart of truth that shows you the effect of demographic on the 10-year bond yield. It pushes it lower and lower and lower as
you get older. As you get older, you save more, you spend
less. Your marginal spending is non-inflationary,
it becomes disinflationary, and bond yields go lower. Then increased debt burden does the same. That’s why corporate investment is so much
lower now than it was in the previous cycle, because debt burdens are so much higher. It’s not rocket science, but that brings down
yields and guess what? Those lower yields because of the baby boom
population who’s just living their best life, well, what’s happening is it’s crushing yields
and crushing yields mean it’s crushing their future returns when they retire because bond
yields are 2%, 1% and they’ll probably go to zero. In which case, suddenly, any projected return
is not correct any longer, you’re going to eat into your capital just as my father had
to. That fall in bond yields has created even
more bubbles, the bubble in private equity and venture capital. You see, the pension system had to find somewhere
on the risk of it and go. The hedge fund industry, they were basically
abandoned from 2008 onwards, was not giving the returns that they wanted. After they crushed the return profile of the
hedge funds by forcing them into low volatility returns and asset gathering models, they then
abandon them because they underperformed the S&P. The madness of this all without realizing
that was their very job to not follow the S&P, but the pension fund managers were desperate. Don’t forget, they’ve made you that promise
and they had to do it, fulfill it in any way that they could. What they did was pile money into private
equity and venture capital at an unprecedented rate. If you look at the chart, you can see in fact,
$5 trillion went into the private markets over this last cycle. That is something truly extraordinary. It’s a complete shift, company stopped IPO
in and they just sold to each other in an endless daisy chain of one private equity
firms selling to another selling to another and that has created enormous valuation problems
within the sector as well. The valuation problems are in the private
sector, the venture capital sector and the public markets. Meanwhile, the pension funds underperformed,
and underperformed and underperformed. Every trick they took never helped, because
the interest rate kept falling. The key denominator of your pension kept falling
and they were grasping for yield everywhere they could, but they couldn’t ever get enough. If you look at this chart, you can see that
the funding status of plans sponsored by S&P 1500 companies are all negative on average,
they just can’t fill the gap. There’s a $400 billion shortfall with the
equity markets at all-time highs, the credit markets at all-time highs, the private equity
markets with all-time valuations, this should have been the bonanza. There was no bonanza here. This was still a disaster waiting to happen
for the next recession because that shortfall is going to happen as these baby boomers retire,
and there’ll be no way these corporate pension plans can pay their promises. It’s even worse for states and local pension
fund level. These funds are 40% underfunded. Look at this chart here. It’s extraordinary again, with this massive
boom, we’ve basically tacked on no growth in the funding. The demographic wall is about to hit them,
and they don’t have enough money. On top of that, several states started raising
taxes, those taxes were used to invest and try and close the pension fund gap. These tax receipts went up, but they all went
in the corporate bond market, and they never closed the gap. The corporate bond market doesn’t have the
returns that it needs to close the gap. There is no way to close the gap. That is their dirty secret. You can’t project 7.5% returns, 6.5% returns
when the entire bond market is trading less than 3%. It’s madness. There is no way to do it. What risk can you take to give you that profile
that pays off within three to five years, when everybody retires? There isn’t one. This cycle after the financial crisis has
been more toxic than any other that I’ve ever seen. You see, the rich got richer. The stock market took off as the Federal Reserve
piled in liquidity. As we talked about the households, they didn’t
buy equities. They didn’t have the money or the stomach
for it. What happened? The rich did, because they could afford it. They made unprecedented amounts of money. They made so much money. Nobody have made that much money ever before. They were celebrating by buying their own
shares back and issuing themselves stock options. It became a crazy bonanza for the rich. Meanwhile, the average guy got left behind. Credit card debts exploded as household just
tried to cover the bills. They doubled since 1999, and the last crisis. That’s telling you how stressed credit cards
are. See, credit card rates didn’t fall at all
with interest rates, in fact, credit card rate’s at all-time highs, they’re higher than
they were in 1990 when interest rates were at 6%, 7%. They’re being penalized. The poor are being penalized while the rich
are getting free money. This thing is what shatters societies and
we’ve seen that across the world. The other thing is, people got jammed in the
US into the auto industry, forced down their throats for auto loans. It’s zero percent. It’s free. Nothing is free. The cars lose value, you lose your money,
and the car companies keep afloat with your debt. People have built an extraordinary bubble
of a trillion dollars of car loans. That’s something we’ve never seen before. Why would you buy all of these assets that
depreciate the moment you buy them on debt? That’s what they were told to do so people
did what they were told. They were told it’s good to buy new cars. This is crazy behavior for people on average
who are heading towards retirement. They can’t afford this thing. Buy a secondhand car, don’t pay for the price
drop from buying it new, but then you can’t get the loans that you want. You buy new and you keep corporate America
float but don’t keep yourself afloat. You destroy your balance sheet to repair theirs. It wasn’t the old that got screwed either,
it was the students, completely destroyed. You want an education? You’re going to have to pay for it, you’re
going to have to pay for it in unprecedented levels. In fact, we’re going to screw you so far into
the future, by the time you finish off paying for your student loans, you’re going to have
to start retiring. Guess what? We’ve left your assets at all-time record
highs, because we don’t want to pay the baby boomers, that is, for your education. Well, that was something you should be pretty
angry about, because it’s going to cost you dearly. It’s got a whole generation of lost millennials
who basically just think, well, what’s the system for? What’s the point? Why even bother with the education, if the
degree that I get is so devalued that I can’t even pay off the loans that I paid to get
it? The risk reward in doing that doesn’t make
sense much any longer, unless you can go to the top university in exactly the right field
to get the right job. If not, it just doesn’t pay off. Yet private universities grow stronger and
stronger advertising more, you need to do this, you need to do this, and issuing worthless
pieces of paper for yet more trillions of dollars of loans. The rich got even richer, because a great
thing happened, software started eating the world. They could replace you by software and so
they did in huge numbers, and you create supernormal margins of which they would reap the profits. Supernormal margins were taken all over the
place at cost of labor. The workers got nothing. They got a lot and you have no bargaining
power. Because guess what? We could just export it to China and they
did in record numbers, or to India or to Turkey or to wherever in the world had a labor arbitrage. That meant that nobody had any pricing power
and nobody could ask for a wage increase. That was another terrible situation because
the rich were getting richer, but nobody else could do it. Wages have stagnated for decades and decades,
as you can see from this chart. Not only that, but wages, so average earnings
of people as a share of GDP fell. Guess why? Because capital got rich, people with money
made all the money. People who were earning money, didn’t make
any money. They lost out, becoming smaller and smaller
parts of society. Again, one of the reasons for the rise of
Trump and Bernie Sanders is exactly these things, is the issue of we’ve been screwed
here somewhere, we just don’t know how. We just went to work, did our jobs and yet
everybody else got rich around us, but look around you. Everything was against you. You yourself being unfortunate, unfortunate
to be part of the largest generation on Earth, created a whole bunch of problems that you
really have no understanding that was happening. Nobody tried to regulate it to stop it happening. Much like in China, they’ve got a huge problem
coming with the baby boom bust because they had one child policy. They need to regulate and decide how to deal
with that, before it destroys their economy from the inside. Japan did a pretty good job because they had
high savings rate, but most other countries don’t have that. They were to debt filled to be able to deal
with a demographic bust. As you can see here, the rich have had an
amazing time of it. The 1% now own 45% of the world’s wealth,
and 10 men alone enjoy the wealth of entire nations. When you look at skews of countries where
the rich/poor divide is particularly obscene, the US is the most obscene of all, but the
median wage is extremely low for the richest nation on Earth. Globally, as I mentioned before, the poor
have become poorer. The problem is, as I’ve mentioned earlier,
and I said in the previous program, we are now at the vertical wall of retirees. The baby boomers in their mass is every single
day are retiring. Every single day they retire, we’re getting
closer to something that I really fear. You see, the average age of the baby boomer
has now exceeded the retirement age. More and more herded into that retirement
point. We’re beyond the average, we’re going into
the bulk of the boomers. Meanwhile, everybody is taking too much risk. If I can stress one single thing to you, and
if this two weeks program of Real Vision stresses one thing for you, is look at what risks you’re
taking. You are in the bubble, you are creating it,
you need to protect yourself and get out of it. Take responsibility for your time and savings
and think about what you need to do to adjust your future expectations. To adjust your future expectations is going
to mean understanding you’re going to retire with less money, I’ll come on a bit to that
in a sec. The point being is if you look at this chart
here, household equity holdings, a percentage of household asset net worth is pretty much
at all-time highs. You have too many equities and your pension
plans are also overallocated, I’ll come to that too. Also, if you look at this chart, you’ve got
too few bonds. You don’t own bonds, which will protect you
in the inevitable recession that I think is dead ahead. You see, when it blows up the Federal Reserve,
and the governments are going to have to do something about it. We’re going to see a number of things, those
number of things are going to be pretty extreme. The Federal Reserve are going to end up, like
the Japanese did, just propping up the pension system. They’re going to be buying assets that the
pension system desperately needs to sell to stop the marking down of assets. I talked about this in the past, that’s going
to meet the gap between the value that the millennials need to buy and the gap that the
boomers desperately have to sell them out is too big for this big clearing of assets. The millennials are never going to buy them,
and the boomers are going to be selling them to the Federal Reserve or the government. That clearing issue is an issue that is the
distortion of the free markets because the baby boomers are being protected, because
they’re going to hurt their way into exiting at the same time just because of retirement. If you can get ahead of that, it would really
help you out, but many people won’t and can’t. That’s a big issue that it’s going to end
up on the balance sheet of the Federal Reserve, and in essence, on the balance sheet of the
younger generations who are going to inherit massive deficits in governments being financed
probably by a central bank, which is probably not a very good thing for the currency and
the purchasing power of that currency over time. They’re inheriting sets of circumstances that
is exactly the opposite of that beautiful period of 1982 when you had huge interest
rates, and the value of money was relatively good, and all you saw was disinflation. These guys are going to see something different. They don’t see inflation for a while I doubt,
but they will see destruction of capital from the purchasing power of money, which is something
I’ve talked about the value of cryptocurrencies and other investments and divesting and investing
outside of the usual sphere of influences, and this week on Real Vision, we’ll show you
some of those that I think offer tremendous opportunities for the future. You see, the problem is here. If you look at this chart of intergenerational
wealth, the baby boomers have all the wealth, Gen X at the same age as their parents, of
the baby boomers, have nothing like the amount of money the baby boomers have, and the millennials
have even less. Each generation, as it develops, is getting
more and more screwed. They have to make choices. Gen X is having to make the choice of being
an entrepreneur. I’ve done that and I think it’s a great choice
because you’re in control of your earning power and what you do. That’s a really key thing because there is
no return from assets to come from us in the traditional asset allocation. Let’s say for the next 10 years, there’s likely
to be negative returns of many. You’re going to have to look at other markets. Again, in Real Vision, we’re going to look
at markets like India or monsoon countries that have great demographic tailwinds or things
like cryptocurrencies that have potentially 10 or 20 years to look. Venture capital in its place, there’ll be
a boom and a bust but venture capital has its place because technology is still moving
fast. There’s a number of places where there are
still real opportunities. Investing in other countries is one of them,
but investing in the S&P 500 or the corporate bond market is probably not there. I’m not sure the property market is, and I’ll
come to property in one sec. Estimates are 21 million households need to
be sold by the baby boomers, either in death or a head off to release assets. Any of you can drive around, let’s say a state
like New Jersey. You go around in rural New Jersey, the beautiful
bucolic countryside, these big old 100-year-old houses, six, seven bedrooms. They’re up for about 600 grand on six acres. They can’t sell them because the millennials,
A, can’t afford them still and B, don’t live there. These whole towns are getting holed out as
the baby boomers age into retirement. We saw that in Japan all over the place. There is no bid for the offer of these houses. Yes, for the brave millennial who wants to
fill out a place in a Led Zeppelin listening gray goateed wearing crowd versus them, the
hipster with a long beard. They just don’t match. They don’t blend the oil and water, but that’s
what it is. There is no bid for the housing. Now also, there is not enough housing for
the young people. What they need is cheap housing in abundance,
near urban places that they want to live in that have low cost of living. There’s not enough of those yet. You’ve got this massive disparity this mismatch. One of the answers that’s going to end up
being is that the millennials are going to have to move in with their parents, the baby
boomers. That way, you solve the household balance
sheet, you solve your babysitting problems, and you solve your retirement, all in one
thing. It’s not such a stupid idea. Just try not to piss off your parents too
much, because they can do the dishes for you from time to time. That trend is happening already. For the first time in 160 years, average household
size is going up as generations move in together. Something truly extraordinary, but I do think
it’s an answer. You just have to change your mindset. It’s like you can retire, you can move to
a cheaper state where the weather is better, or you can move to a country where the healthcare
is affordable, you can do that. It is within your power to accept a lower
income, but still have a quality of life. It’s the same with thinking of multi-generational
households. In the end, it makes a lot of sense. Maybe it’s not so apparent. Living in your parents’ basement may become
the joke, but your parents and you living together, well, that you could create quite
a quality of life again, if you don’t drive each other mad. Everyone says, what’s that going to do for
housing? Well, the probability is that house prices
are going to be a bifurcated market. The ones that the millennials want are going
to be overbid, the ones that baby ones want to sell, oversold, but net-net, the housing
market will probably deflate gradually over time. There are some markets I think, in Miami,
for example, where things got effervescent. I think New York is spectacularly overbuilt,
and there’s going to be a huge problem in New York, but that’s normal in a big city
like that because real estate booms and busts, it will clear eventually, because New York
is one of the world’s great cities. Miami’s gone through this because in the end,
people still want the sunshine, but the prices are too high, and they’re going to come down
again in Miami. It’s always the canary in the coal mine, it’s
stopped to happen. We can see it everywhere. Over time, I think a lot of America will see
this. The rust belt, there’s no buyers of houses
in the rust belt, there’s just nobody’s moving there. Unless you have a proactive and there’s some
people who will hate this, a progressive government that builds out true incentives for people
to build new communities out in the central America, those societies are going to get
hold out. It’s not going to help by knocking down a
wall and stopping immigrants and a number of other political solutions, it really is
from the ground up rebuilding communities and incentivizing them. That I think will make a difference. I think that is why you’re seeing the dichotomy
of the rise of Trump and the rise of Sanders is those two things are two different lenses
on the same problem, and I think we’re going to go from one lens, which is restrict and
protect to another one, which I think is going to be invest in. Now, you may see with other people’s money,
who the hell knows? They’re all spending like crazy anyway so
other things make a great deal of difference. I think the end result is the same result. We all know it’s unsustainable in the end. How? When? Who the hell knows? In the end, this whole thing is a mess. It’s a horrible story of ordinary people doing
ordinary things. Buying their first clothing, their first house,
their first car, making their first investments for retirement, buying a house to add to their
retirement pools, and then saying to their pension manager, look, just give me what you
promised me. People have been pretty rational. Yes, there’s been of the old mania on route,
but generally speaking, it’s been a rational behavior but by 76 million people at the same
time. That’s caused this problem. You should be ahead of the 76 million. Don’t be the last one out the door. Think about where your assets lie. Think about the fact that Tokyo property prices
which were a spectacular bubble have fallen for 35 years. Think of every single other demographically
challenged equity market that all peaked out decades ago. Europe peaked out in 2000, Japan in 1990,
most of Asia in 1990. These things are real. They’re what happens when the baby boomers
hit the road. That is the thing we need to take into account. Now, if you’re like me, a Gen Xer, then you
need to think differently. Think about, okay, what is it that I can get
yield from? We’ve talked about things like trailer parks
and there’s a number of things of yield. I wrote a great article in GMI recently about
medical practices, things like dentists and stuff. They still don’t cost a lot. They trade on a piece of three or four, and
they have huge cashflows. There are businesses that offer huge cashflows. Renting yourself out to do things has huge
cashflow benefits. Moving. Move to Spain, the cost of living in Spain
is a fraction and then in Cayman Islands, it’s just ridiculously expensive, but I don’t
pay tax so that offsets it somewhat. Still, there’s different ways you can enhance
your life and make choices that will give you the chance of retiring, but just don’t
follow everybody else. Beat your unique path. If you’re young and you’re seeing your parents,
help them, share this video with them, make sure that they watch this and they understand
the risk because it’s them I’m really worried about. You guys, the young guys, yeah, it looks pretty
fucked now but you’ve got the benefit of time. You can make some mistakes, you can make some
great choices. Maybe it’s not cryptocurrency and Bitcoin. Maybe it’s investing in India, maybe it’s
starting your own business. Whatever it is, you’ve got the time to do
it. The Gen Xers have less and your parents have
none. If you can all do me a favor, I’m going to
make sure this video is free. It’s the most important video I can possibly
ever make. Watch it in conjunction with the previous
retirement crisis episode, and please share it with anybody that you know. If you’re young, share it with your parents. If you’re a baby boomer, share it with your
friends. Just make sure that people are aware of what
is going on and what they need to do to avoid getting bankrupts in retirement.

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