My wife and I are Baby Boomers – the tail end of that generation, but Baby Boomers nonetheless. The named generations for those born in the twentieth and twenty-first century are:
– GI Generation (born 1901-1924)
– Silent Generation (born 1925-1942)
– Baby Boomers (born 1943-1964)
– Generation X (born 1965-1979)
– Millennials (born 1980-2000)
– Generation Z (born 2001-2015)

The U.S. economy has been largely consumer driven since the end of World War II because the Baby Boomers and Generation Xers are known more for buying stuff than for saving money. There is a logical chain of events that can explain this consumerism. The Great Depression and World War II had a lasting effect on the GI and Silent Generations. The GI Generation were savers because you could never be sure when another era of deprivation would be coming.

For their children, that deprivation came from their parents in the form of stinginess and dire warnings about what could happen if they were not prepared for financial upheaval or the next inevitable war. And that war seemed awfully close and would be more devastating that any that preceded because of the destructive power of nuclear weapons. The Silent Generation was raised to fear so many things beyond their control that they held tightly to the things they could control. The worked hard, saved their money and tried to raise their children to live the same way.

Their children would have none of it. By the time the earliest Baby Boomers reached those rebellious late teen years, World War II was fifteen years in the past and neither the U.S. nor the Soviet Union had attacked the enemy with nuclear weapons. There had been conflicts between communist and capitalist countries during the Baby Boomers lives, but it affected a much smaller percentage of families than did previous wars. More Americans died during the Korean War than during World War II, but the geographical scale of the conflict was much smaller and the war was further away. With the U.S. economy booming, the Baby Boomers developed an optimism that their parents could not have mustered after their upbringing during the Great Depression and World War II.

The United States became the manufacturer to the non-communist world following the war. This is an easy thing to achieve when, other than Pearl Harbor and a couple Aleutian Islands, the fighting was not done on American soil. The competition to U.S. manufacturing was almost completely destroyed in Japan and Continental Europe, and the United Kingdom suffered substantial Industrial losses as well. The U.S. was also in a strong financial position. The United States suffered more than any other country during the Great Depression and entered World War II rather weak financially, but by the end of the war, the U.S. was a large creditor nation. Many European countries owed large sums to the U.S. for military supplies provided during the conflict.

Finally there was the social change. The Baby Boomers’ parents grew up with the warning that irrational exuberance was followed by disaster – that is, the Roaring 20’s was followed by the Great Depression. Consequently, for the Silent Generation, there was a resistance to changing the country’s social landscape. The Baby Boomers had less prejudice to change. The country’s prosperity made change inevitable. The most important vehicles for social change came from expanded electrical service throughout the country and a greatly improved highway system. Very quickly people could see what was happening far away by either traveling there or watching the news or entertainment on newly acquired televisions. While by no means unanimous, the Baby Boomers more readily accepted that someone was no less a person just because of the color of his skin. For some, their embrace of new music trends led to a community feeling which leant power to the idea that change was a force for good.

So Baby Boomers lived during a time of economic prosperity, nuclear threats that never came true, and significant social change in the country. For the older members of this generation, the jobs were plentiful, employees and companies were loyal to each other, and success was available for anyone who had talent or the ability to work hard. They had the advantage of riding the Baby Boomer wave. The large size of the generation ensured that they would fuel the economy for many years and the older members could reap the financial rewards from their established positions within companies.

So how did the Baby Boomers become so obsessed with obtaining possessions? There is a term in this country known as “Keeping up with the Jones.” The wealth acquired by the older Baby Boomers led to the purchase of new and better cars, houses, televisions, etc. Those houses were generally outside of the cities (in the suburbs) so that the “wife and kids” could have places to plant flowers, run and play without the concern of the crime that was a problem in American cities. As more people moved to the suburbs, the cities looked more dangerous because there were fewer people who looked like the wealthier Baby Boomers.

Once in the suburbs, people’s possessions were more on display. Unlike apartments in the cities in which the exteriors looked pretty much the same, life in the suburbs meant that the appearance of the house, landscaping, car in the driveway and breed of dog were under constant scrutiny. I believe suburban living and the desire by a large number of Baby Boomers to “Keep up with the Jones” by purchasing the newest and best products available led to the our consumer driven economy. Let’s not forget with whom they were keeping up with. The “Jones” weren’t just the neighbors on your street, they were also all those wonderfully happy and successful people portrayed in magazines and on television programs and advertisements.

So now let’s consider Millennials. We are the parents of two considerably different members of that generation. One is driven and will graduate as a chemical engineer in a few months. She has signed a 2-year commitment to work for a large food products manufacture and will begin her professional life this summer. The income is very good for a single women. Our son is living in a beautiful part of the country, hikes or runs in the mountains almost every day, has minimal expenses, works part-time by choice, teaches himself to play new musical instruments for fun and is very much enjoying life. He’s taking some online classes and exploring his options, but strongly feels that he will end up working outside the traditional employer-employee relationship.

From an economic standpoint, these considerably different Millennials are quite similar. They can be entertained for countless hours with a $7.99 per month Netflix account, or with video games played on a $350 Xbox, or watching shows or movies on an iPad or on the TV using ChromeCast. They don’t need the big house, the new car, the perfect landscaping. My daughter would like to live in a vibrant city and is willing to drive an hour one way to the manufacturing plant, if necessary, but her day-to-day costs will still be low. If she could find a chemical engineering job within a desirable city, she wouldn’t even own a car.

This generation likes to travel, but inexpensively; they like to hike and camp. They don’t have loyalty to employers because they know that the companies will not be loyal to them. Many work from home in the contractor-rather-than-employee economy which is prevalent in this age group.

Relationships are more casual and marriage may not be in the cards. The number of 30-year-olds who reported never being married doubled in the 2010 census versus the fairly consistent numbers reported in the 1980, 1990 and 2000 censuses. If they do have children, they will buy the best and are willing to pay for it, especially if they live in or near affluent cities. They’ll get the best locally grown organic foods and a super-stroller of some sort, but they’ll teach their children to live simply as they do and appreciate nature and public art. Because many work from home, they will not necessarily pay for childcare, but rather work out a bartering arrangement with other parents for time away without the kids.

So what will the Millennium Generation economy look like. Less consumption, but there will certainly be areas that will benefit. Technology, especially software that entertains or informs using inexpensive or existing hardware, will be in demand. Socially conscience products which make the purchaser feel as if he or she is helping correct an injustice will also be appealing to this demographic. Millennials will purchase fewer products and more services such as eco-travel, rock climbing memberships, parent-child exercise classes, weeks at ecologically-themed camps for the kids, and probably dining out.

So, how does one invest for this new economy? With consumer purchases driving 70% of the U.S. economy, what will happen when the Baby Boomer and Generation X consumption is replaced with Millennial Generation thriftiness? Keep in mind that Baby Boomers hit retirement age at a rate of 10,000/day for the next 15 years.

Targeted investment is going to be very important. Unless U.S. consumerism is replaced by purchases of U.S. products and services in other countries, the economy will grow more slowly. The Congressional Budget Office seems to recognize this and predicts a real Gross Domestic Product growth rate of 2.3% over the next ten years. The post-World War II historic real GDP growth rate is 3.2%.

For the first time ever, I am advising against having an S&P 500 Index Fund as the core investment in a portfolio designed for the long term unless you purchase it after some panicked selling. Of course, trying to predict the bottom of a market correction is like trying to catch a falling knife – you may get hurt.

So, what to buy? I think multi-family rental real estate in desirable cities and organic farms within a couple hours of affluent cities would be good investments, but not liquid ones. Alternative schooling options could be lucrative if you choose the right one. There’s a lot of money in education and I have some ideas, but I’ll save that for another post. Stocks of certain companies will rise even when the rest of the market falls, so the right tech and food company stocks could work out.

A Tale of Two Bubbles and One Stock

I’m already beginning to miss the Baby Boomer spending patterns. I bought stock in Corning, Inc. in 1998 for $42/share. The Dot Com bubble drove the stock price up to about $340 because all those new technology companies were going to generate a huge demand for fiber optic cable and Corning was #1. There was a 3 for 1 stock split and the bubble burst. Corning’s stock dropped to $1.10/share – more than a 99% loss. That was the first bubble.

If I had bought shares of Corning at around the $2 range in late 2002 and held it, there would be a better ending. The Baby Boomers came to the rescue for Corning. When interest rates for treasury bonds fell, investors wanted a safe investment vehicle that paid more than treasury bonds. That was the beginning of the housing bubble because Wall Street invented a way for investors to obtain a good yield with little risk by bundling mortgages together. This was a very smart idea (no, I’m not being sarcastic – it was a brilliant idea as originally designed). Investors loved it and wanted more and that’s when things went wrong. Garbage loans were made to people who couldn’t afford them and the investments no longer contained a normal collection of mortgages where the long-term default rate was known, but a higher and higher percentage of bad mortgages just to generate more investment options to meet the huge demand.

So the Baby Boomers were convinced that housing prices would always rise and generate high rates of return on their houses and rental property. They took out mortgages which they could never pay if the market dropped, took equity out of their houses by refinancing those loans into other mortgages they could never pay and spent the money. One of the popular things to buy in order to keep up with the Jones – big screen television sets. As the world’s #1 glass maker, Corning’s business picked up and the stock rose nicely. If I had picked up those $2 shares five years earlier, I could have sold them for about a 1,300% gain in late 2007 and paid for my kids’ college by sticking the profits in 529 education accounts. For such an astounding investment success, you could thank the Baby Boomers.

The Millennials, on the other hand, watch shows and play games on tiny screens on their cell phones. Kids these days! How am I supposed to invest now?