Musings Report #22 5-31-14 Generation-Y Bet: Short the Banks, Housing and Luxury Retail

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Generation-Y Bet: Short the Banks and Luxury Retail

Mish recently posted excerpts of a Brookings Institution study of changing generational values: How Millennials Could Upend Wall Street and Corporate America.

The gist of the report is that Gen-Y (Millennials) view money, prestige, adversarial confrontation and managerial methods differently from the Baby Boom and Gen-X generations, and that this set of values will change Corporate America, the economy and the political culture as Boomers exit managerial positions.

Though we have to be careful in characterizing tens of millions of individuals as all reflecting the same set of generational values, the basic idea is simply one of context: people who grow up in a specific milieu are naturally prone to sharing broadly similar perceptions and values.

The Brookings authors claim that Millennials do not favor the adversarial style of the Boomers (competition and confrontation as the means of advancing one's cause/position) nor do they place great value on luxury goods and exclusivity. They actively distrust/loathe the banking sector, and are financially conservative, preferring cash to investing in Wall Street.

Asked to choose their ideal (corporate/state) job, their choices reflect preferences for a mix of security, idealism and technology.

The big flaw in this career questionnaire is that it did not offer the alternatives of self-employment/entrepreneurship. Anecdotally, it seems clear that there is a strong entrepreneurial drive in Gen-Y--for example, What I’ve learned in my first year as a college dropout.

One factor the report did not address fully is real estate/housing, which depends on bank-issued debt (mortgages) and if prices stay elevated, inherited wealth.

This raises two issues: if Gen-Y cannot afford to buy Boomers' houses at bubble-level prices, then what will keep housing prices from falling as demand diminishes?

The second factor: how much of the Boomers' housing wealth will trickle down to Gen-Y when they actually need housing, i.e. when they're starting families, etc.?

If we add these two factors together, we can imagine a housing market in which Boomers are unloading millions of primary homes as they seek to downsize/raise cash for retirement but there aren't enough Gen-Y buyers willing or able to buy these millions of homes at bubble valuations.

In this scenario, home prices must decline to align with Gen-Y's salaries (i.e. their ability to qualify for huge mortgages) and their willingness to shoulder a lifetime of bank-based debt.

If Gen-Y essentially opts out of the belief that financial security depends on buying a house with a large mortgage, then the U.S. housing market will have no sustainable foundation for price appreciation. Housing could easily decline by 50% in highly inflated markets.

If the primary assets held by Boomers (houses and stocks) both decline for fundamental reasons, there may be relatively little wealth left to pass on to Gen-Y. There is a peculiar irony in this: if Gen-Y avoids bank debt/mortgages, buying conspicuous consumption luxury goods (bling) on credit and investing in Wall Street, this lack of demand for housing, stocks and luxury goods will effectively crash the sky-high valuations of these assets.

That will reduce the value of whatever generational wealth the Boomers have left to pass on. Since many Boomer households are currently paying for three generations--soaring college costs for their Gen-Y offspring, care for their elderly Silent Generation parents and their own expenses--how much wealth they will have left is an open question.

These factors suggest a generational bet against banks, housing and luxury retail stocks. I am not recommending such a bet, mind you; it's just one interesting speculative side effect of the changing of the generational guard.

Summary of the Blog This Past Week

This Is What's Wrong with the Legal System in America 5/31/14

Still Think the Fed Isn't Fueling Inflation? Check Out This Chart 5/30/14

Our "Make It Look Good" Economy Has Failed 5/29/14

Why Are Food Prices so High? Because We're Eating Oil 5/28/14

The Housing "Recovery" in Four Charts 5/27/14

Memorial Day 2014: Just Following Orders 5/26/14

Best Thing That Happened To Me This Week

I heard Poulanc's Gloria and Faure's Requiem performed live, in all their splendor, with a dear friend who has sung the Requiem (as part of the chorus) in other performances.

Market Musings

Gold resolved the descending triangle to the downside, confirming the technical bias that descending triangles are bearish. I don't see any technical evidence that gold is ready to reverse (though it may well bounce off oversold levels), nor do I see any persuasive evidence of an impending reversal in the S&P 500. If there will be a significant decline in equities this year, perhaps we can start looking for warning signs in late July, which is when weakness that reaches full flower in September/October usually becomes visible.

The risks of stocks and bonds re-aligning with the deteriorating global fundamentals are increasing, and so being long stocks requires taking on a lot of risk to squeeze the last few percentage points of gain out of a 5-year long Bull Market.

But trying to catch the absolute top and short the inevitable decline is risky, too, as there is no reliable way to pinpoint the top in a market that is still being propped up with central bank liquidity and the complacency of "don't fight the Fed" and various carry trades (yen/USD, etc.).

It's supremely boring to be out of the markets, but trading discipline is especially valuable in trendless markets where the temptation is to gamble rather than take positions with high probabilities of success. So until mid-July rolls around, I'll continue to monitor the weakening fundamentals in the global economy and stay emotionally detached from market churn.

From Left Field

The Making of Led Zeppelin's 'Whole Lotta Love': An oral history from guitarist Jimmy Page and the engineers who helped place Robert Plant's vocals at the top of the charts.

Led Zeppelin: Whole Lotta Love (5:35)

What Does Your Life Look Like in Weeks? (via G.F.B.)

The fully functional $12 Gongkai Phone (via Lew G.)

spurious correlations: for example, Number people who drowned by falling into a swimming-pool correlates with Number of films Nicolas Cage appeared in

What I’ve learned in my first year as a college dropout --interesting Gen-Y entrepreneurship story....

Thailand has a coup addiction (via Katharine K.)

How not to get your bike stolen -- double Krytonite locks.... not mentioned--chain a very grotty, gross-looking stained helmet to the bike, and leave a brake cable dangling....

tempting Europe With Ugly Fruit (via Katharine K.)

Only known chimp war reveals how societies splinter -- don't we share 95% of our genome with chimps?

Why Productivity Growth Is Faltering: Regulations Soaring; Entrepreneurship Sinking -- usual suspects... mindless regulations, anti-competitive moat-digging...

Fauré Requiem In Paradisum (3:02) beautiful piece of musical heaven on Earth

"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable." Adam Smith

Thanks for reading--

charles