Boomers cashing out could crash stock market

How far into the future can you see? And what will you do about that vision?

Some academics have extrapolated the known and have made some dire predictions about the stock market's movements and what it portends for baby boomers as they retire. They believe that stock market values could become severely depressed when boomers try to sell their assets and discover that no one's interested in buying them.

Jeremy Siegel, an otherwise mostly optimistic professor of finance at the Wharton School of the University of Pennsylvania, expresses concern about this phenomenon in his book "The Future for Investors."

"Looming in the future are changes more fundamental and long-lasting than all the crises that have confronted our economy in the past. ... The dramatic increase in the number of retirees and the pending sale of trillions of dollars of stocks and bonds threatens to crush asset prices and drown the baby boomers' hopes of a comfortable and lengthy retirement."

A trend that wasn't
In 1970, futurist Paul Ehrlich wrote of demographic trends that threatened to create "The Population Explosion." Remember? But that never materialized. Instead of rising, fertility rates declined in many countries. In the United States the birth rate fell from a high of 3.68 in 1957 to 2.1 today. The feminist movement can be partly blamed or credited for that reversal, as women entered the work force in droves, contributing more income to the household, but fewer babies.

But now, as retirement looms for millions of baby boomers, there's the threat that the stock market may sputter just as we attempt to enjoy the fruits of our labor.

Should we be alarmed?

Not at all, say those on Wall Street who remain unconvinced that demographic trends will have much impact on the markets. After all, they argue, the richest 10 percent of Americans own nearly 90 percent of the stock owned by individuals. They're not likely to be in a big hurry to sell their stakes, so any selling by other individuals won't likely make a huge difference.

But pension-fund managers are big investors in the stock market, with control of more than half of U.S. equities. They're investing for clients at all levels of the income spectrum. What will happen when it's time to liquidate these assets for retirees?

The global solution
Investors from such developing countries as China and India will step in to buy them, Siegel concludes after expounding for 50 pages on the severity of the problem and the solutions that would not work. "The next half century will see a massive exchange of goods for assets that will not only shift the center of the world economy eastward, but also negate the destructive impact of the age wave on asset prices and retirement opportunities," he says. "I call this the global solution."

Of course, this means the United States will have to cede its position as economic superpower and will have to be more open to capital flows from such places as China. So when a Chinese company tenders an offer to buy a U.S. company, our politicians can't go ape nuts and say absolutely not; forget it; not for all the tea in ... well, you know. This happened a few times in recent months, most notably the thwarted high-profile offer by Chinese company Cnooc for Unocal.

China and other foreign governments are big buyers of U.S. treasury securities. So, it's only a matter of time before China and other developing countries move assets into equities, Siegel believes. While he admits he doesn't know to what extent foreigners buy U.S. stocks right now, "my feeling is that value's increasing, and my projection is it will be increasing at a much more rapid rate in the future," he says.