There has been a demographic phenomenon as large numbers of people in developed economies pass through their 40s and 50s. These people are great savers and their savings have driven down bond interest rates. The demographic phenomenon is about to stop as these people move into their late 50s and early 60s. They will save less and reduce their spending as they move into retirement. Bloomberg writes about what happens to bond when people quit saving in an article predicting the great bond bust of 2020.
The “global savings glut” is perhaps the most famous theory behind the three-decade slump in bond yields. That glut has stopped growing, and will start shrinking in a few years, in a potential game changer for markets, Gavekal Research Ltd. analysis indicates.
What propelled the glut was demographic patterns in big economies that saw a surge in the share of people aged 35 to 64, which tend to be years of high savings, Will Denyer, an economist at Hong Kong-based Gavekal, wrote in a report this month. When those demographic patterns reverse, the implication will be potentially “big rate rises” and the risk of a “major fall” in global equity valuations, he wrote.
In fact ex Fed chairman Alan Greenspan has predicted that around 2020 inflation will take hold driving interest rates up and the value of current bonds down. Likewise equities will devalue along with currencies. This is a dire prediction considering that the stocks are trading like 1999, as noted by CNBC. Their opinion is that there is no immediate risk but they cite two technical factors to watch out for.
While the market’s sustained momentum has some investors nervous, Krinsky said it isn’t showing hints of two key indicators that show the trade is going too far.
The first is when momentum stocks stop outperforming and start breaking down below their moving averages. The second is when they extend even higher from their moving averages, creating what the technical analyst calls a “blowoff scenario,” where essentially the stock runs up too far and “exhausts all the buyers.”
While the analyst believes that the market has room to run he says nothing about the demographic factors that will take investors out of the bond and equity markets. While technical analysis is the best guide to short term to medium term movement in the markets traders need to be aware of the fundamentals if they remain in a position for an extended period of time.
An example of technical analysis is when the market is very bullish on a stock. That typically means that those with money and interest have bought the stock already. With fewer buyers left over the odds begin to favor a downward movement of the stock with any flicker in the stock price as those who have gains will often take profits. The profit taking causes more profit taking and a substantial correction sets in caused by herd mentality. The day trader steeped in technical analysis can short the stock and ride this correction down to a support zone, making profits along the way.
A smart technical trader probably needs to consider an exit plan both for bonds and stocks as people quit saving and move into retirement
