Tuesday, January 24, 2012

How Gen Y Will Undermine Asset Prices

My two favorite realtors are Diana Olick and Craig Kamman.

I like Diana because she is smart and hot.

I like Craig because he is smart and...well...kind of homely. But then again, I am not a girl, and I have been informed he looks like Napoleon Solo from Man from UNCLE.

Regardless, Craig has an optimistic tone to his real estate analysis, searching for the bottom so once again he and his fellow realtors can start looking for an upswing in real estate.

Sad to say, I don't think this upswing will ever materialize. The reason is simple:

Gen Y just isn't responsible enough for home ownership. Matter of fact, they're not responsible when it comes to a lot of things and this bodes very ill for asset prices, be it housing, stocks or bonds.

Housing for example requires too much maintenance, work, paper work, and just plain old-fashioned fiscal responsibility. You have to have your financial house in order before you qualify for a loan. You have to be able to have reliable and secure employment to make the payments. You have to pay for things like insurance or taxes you didn't notice before when you were renting. And, gosh darnit, you have to learn how to do basic house maintenance. These factors alone will deter the latest generation coming off of the dying American assembly line, but there is another factor that will keep them out of the housing market that isn't their fault - their horrendous employment prospects.

Naturally many of them chose to major in Music Therapy or Chocolate Eating, so they deserve the long waits in the unemployment line. But lets face it, the previous generations have done a craptastic job of maintaining the US as a viable and growing economic concern and have left this latest generation with the worst labor market since the Great Depression. And without jobs, people can't afford houses. Plus you throw in the bad taste the housing crash has left in people's mouths, and you can forgive Gen Y being a bit reluctant to become home-owners, just as Gen X after seeing the Divorce Olympics put on by the Baby Boomers is now reluctant to get married.

Following the same thread that jobs permit people to afford a lot of things, investments or stocks would be another asset category suffering from poor job prospects. Since I've opted to make less than $30,000 a year to enjoy the decline, I haven't contributed to an IRA or 401k in years (this is also because I believe they will be confiscated away anyway, and their preferential tax treatments rescinded). But that is by choice for me. Tell Gen Y to invest in a 401k or IRA all you want, without jobs, they can't. They don't have the disposable income. Plus, I don't think they have the financial acumen to put together a budget, let alone a long term retirement plan. They're too busy playing X-Box (which I'm for) in their single-parent's basement (which I'm against). Regardless, since nobody looks at dividends or cash flow any more for their retirement plans and only focus on capital gains, I'm sorry to say the cash flows necessary to maintain the 12.83% rate of return the entire retirement industry banks on will not be there to inflate those capital gains into reality simply because Gen Y isn't responsible enough to save for retirement AND they just plain can't.

Finally, bonds are not that safe either. All the collections and past due loans I get to work through, not to mention my decade of previous experience, it is the teens and 20 somethings that are the worst abusers of credit. Some of them literally have no idea that they're supposed to pay what they borrowed back. It's almost as if the concept of BORROWING is lost on them just like our president. They think it's just a gift, and so they rack up credit card balances they can't pay, student debt loads they can never afford, and buy cars they could never pay back. Of course, Gen X and the Baby Boomers were no saints when it came to fiscal discipline, but it's not getting better with successive generations. It's getting worse.

Whatever your opinions on generational fiscal austerity are, the fact is dem der bonds you're relying on for the interest income and principal payment? Yeah, guess who will ultimately be responsible for paying back those debts? Be it federal treasuries, REIT, bonds, etc., you name it, it's going to be Gen X and Gen Y (and mercy, I'm afraid to think what will come after that.). Again, I don't see them as the fiscally responsible type capable of earning most bonds a AAA rating.

Sadly what we're witnessing here is how tough fatherly love translates into economic growth and fiscal responsibility, both of which are required for assets to maintain their value, let alone increase in value. But because we failed to install the harsh, fatherly love and fiscal discipline in future generations, those generations will frankly not be able to produce the economic production and profits that are necessary to prop up those asset prices. Future generations will rent, because owning homes is too hard, and so I predict demand for housing will drop well below what the historical trend has been, bringing prices with it. I believe because of a crippled economy, the idea of trillions of investment dollars artificially propping up stock prices and mutual fund prices, just isn't going to materialize as Gen Y lacks the means and ability to invest for retirement. And when you want that "safe haven" of bonds and fixed income? Well fixed income securities require responsible, fiscally disciplined people on the other end to pay you back.

In short, the (entirely falsely premised) retirement system that relies 100% on perpetual and unsustainable capital gains, will be crushed even sooner and the only real reason to invest in assets would be an inflation hedge against the dollar. That or you could invest in firms that outsource their jobs overseas to maintain profitability, and hope that foreign demand for goods made by US based firms (but produced overseas) more than offsets the decline in demand here.

But don't listen to me. I'm just a meanie, evil economist here to ruin everybody's good time.


Jay said...

Sheesh Cappy....you sure know how to deflate a man's sense of hope.

Okay so America is gonna suck something terrible...well then where should one move to, to avoid all these defaulters and bums. Chile? Canada? Costa Rica? Iceland?

Some of us actually want to invest and start businesses.

Amateur Strategist said...

Do you suppose that generational attitudes and principles (at least in the ways mentioned in the article) are cyclical?

Generation A: Very on top of things and able to care for themselves and others.

Generation B: Taken care of Generation A to the point that they know not how to do any of these things.

Generation C: "Taken care of" by Generation B so, naturally nothing was done for them and they had to figure it out themselves, this gives them both an eventual strong sense of independence and on-top-of-things-ation.

Generation D: Taught by Generation C to be independent and even trained by Generation C on many things, they are independent (tbh, starting to hate that word with the way some have used it) but NOT taught to teach the next generation these hard-learned principles.

Generation E: Not taught the self-sustaining principles and A, C, and D know, they are pretty much a copy of Generation B.

Anonymous said...

It is a good thing there are so many Indian's who what those jobs. We will just watch all of our population of useful idiots disappear into proverty and then into nothingness as those who have a drive will take the place of the workers in our society.

We really don't need the Gen Y.

Good riddance.

Anonymous said...

As you all know, I do not advocate going and murdering bankers simply because on the grounds it is illegal.

This sentence doesn't make sense, though I think I understand what you meant.

Anonymous said...

The real problem with many in Gen Y is they are the first generation to come along with a greater sense of entitlement than the worst of the Boomers.

I had this Gen Y law clerk. Smart, but utterly convinced in the rightness of all of her thoughts and self-righteous to an extent that would make a Straight Edge kid seem epistomologically modest. Law clerk - then finishing her third year of law school - starts lecturing me one day on a point of law, gets really pedantic and snotty on me, then smiles and walks off.

Oddly enough I've been practicing in that area of law for over ten years. Drafted a white paper on the particular point she was going on about. Read a couple scholarly articles on it. I knew she was wrong and told her as much but she insisted I just didn't know. So I went back and double checked. As it happens she was *dead* wrong on a major point of law. I was right. And based on past experience, if I put the materials in front of her to prove her wrong, it would induce tears, and protestations that I am singling her out, picking on her, and it's not fair on my part. So I let it go. She's working for somebody else now - thank God. That Entitlement Shell that she lives inside is impenetrable and a serious barrier to performing good legal work. If you want to be a good lawyer, it's not just about arguing convincingly; you need to keep an open mind and consider at all times the possibility that you may in fact be wrong. Tears won't bail your ass out when the three judges on the 2nd Circuit decided three years ago to kick your ass this morning.

This is pretty much typical of my experiences with the Gen Y's. There are a lot of good folks in that generation, but a lot of disgustingly entitled, self righteous little prigs and you can't tell them a damn thing. I think I kinda prefer the hard working alleged slackers of Gen X.

sth_txs said...

I agree with the Captain's thoughts here. I was talking a older cousin in his late 60's that finds in his conversations with Gen Y's that they do have this sense of entitlement.

As a Gen Xer, I would have been a lot better off if the government would have just been out of my wallet and I could a do a lot of things better for myself.

We're doomed!

happy one said...

Not a member of generation y, but aren't those people simply acting rationally? If you know that the system is going to collapse sooner than later, and know that it will be an incredibly long time before we can crawl our way back to the current economic climate --doesn't it make sense to "get yours" before it all goes away? Especially knowing how much debt has been placed on your plate by others to such great amount it can never be repaid?

Anonymous said...

Kamman is 'homely'? You're really not gay at all, are you?

Anonymous said...

Everyone in the US is going to have to start working soon because everyone else in the world is going to get sick of lending you money to buy their stuff. Problem is, too many college graduates not enough farmers. USs largest export to China...soybeans. Get the pitch forks ready people get mighty hungry.