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By Staff | Sep 2, 2011

I don’t have a stock portfolio. Neither did my grandfather or father before me. We never had any use for one. I still don’t. I don’t trust Wall Street. Oh, I wish I had bought Apple stock but there are a thousand times more sour grapes than Apples out there. 401k investments sold well to the public during the bull market of the 1990’s as a diversified retirement fund. I have never figured out how that works. I don’t believe that I have ever heard anyone claim that their 401k outperformed their expectations or even performed at all.

When the stock market tanks, stock brokers contend that they become hand holders convincing nervous investors to remain committed to the market. They tell them not to worry as their retirement is well into the future and the market will come back to reflect the average. After outperforming the average during the 80’s and 90’s doesn’t that mean that they could underperform for a long time and still hit the average? Isn’t somebody retiring today or wants to but can’t? We hear of people saying that they can’t retire and have to keep working longer because of the poor stock market performance. What if they keep working and the stock market continues to under perform. . .do they ever retire? Why is it going to be any better 5 years or 10 years from now?

During the 1980’s and 1990’s the baby boomers were buying stocks for their retirement portfolios. That buying contributed to the bull market.

Doesn’t it stand to reason that when they need their retirement cash and they are selling, that it will at the very least, cast a pall over the stock market? The San Francisco Fed thinks so. They made public a research paper that concluded that baby boomers will quickly consume their savings as interest rates stay low for an extended period of time and will sell stocks for income.

How does buying stocks in a bull market as was done, only to sell during what Fed economists believe will be a demographically driven bear market, work for a retirement plan? Savings accounts now bring .15% interest. CDs bring more but you get the point. When I was a kid I was told to save money and had my passbook savings account. I was told that compound interest was powerful and I would see my money grow in the bank. Even then I wasn’t that impressed with the idea. How powerful is compound .15% interest? What would you tell a kid about saving money today? I would tell them to buy old Winchester 22 rifles. They won’t drop in value, but that is me.

Some banks are considering charging customers for keeping their money safe in the bank as banks are not making any money off interest income either. The Fed plan to flatten the yield curve will make making money as a banker harder to do. It was pretty easy with the yield curve as it was to lend those cheap deposits to the Federal Treasury and make money. That was the whole point as to how the Fed recapitalized the banking system. They made it easy to be a profitable banker. Now as they flatten the yield curve, banks will have to work harder to find returns and profits. That too is the whole point as the Fed wants them to lend money to get the economy growing instead of parking it in Treasuries.

As to the Stock market, those Fed economists concluded, “The baby boom generation born between 1946 and 1964 has had a large impact on the U.S. economy and will continue to do so as baby boomers gradually phase from work into retirement over the next two decades. To finance retirement, they are likely to sell off acquired assets, especially risky equities. A looming concern is that this massive sell-off might depress equity values. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.”

“We find that the actual P/E ratio should decline from about 15 in 2010 to about 8.3 in 2025. The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021. On the brighter side, as the M/O ratio rebounds in 2025 (BK: M/O- Baby Boomers die), we should expect a strong stock price recovery.”

What the study basically said was after the baby boomers have sold their stock and die, then the stock market will recover and get good again. It is all about demographics.

How about Farmland? Some think that soaring farmland prices must mean that now is the time to sell. Why? What would you do with the money. . .put it into the stock market that won’t perform until after you die? Or put in the bank and maybe get paid close to a percent interest on it if they don’t start charging you to keep it on deposit. Farmland rental income produces 3-4% returns. That is why some who are retired with money in the bank are taking it out to buy farmland. At least they get a return on it and it has been appreciating in value as they are not making any more of it in this country.

Past performance is no guarantee of the future but some who bought farmland 20 years ago are receiving the cash rent equivalent of 15-20% of their purchase price today while the underlying value of the farm has raised 300-400%.

What has your 401k done? Wall Street doesn’t understand the Ag sector and they don’t want to get their shoes dirty with a farm if they can help it. If Wall Street does start buying farmland in earnest making ETFs out of farm values to trade or begin bundling farmland mortgages then you would know that the jig was up and it is time to sell. Who knows…by then it could be $20,000 acre.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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