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Thomas J. Lee, CFA, believes market movements are closely linked to generational mindsets, that major economic shifts occur in tandem with generational milestones.
“Generations drive markets way more than we appreciate,” the co-founder and managing partner at Fundstrat Global Advisors explained at the CFA Institute Equity Research and Valuation Conference 2018. Using data from the United Nations Department of Economic and Social Affairs, he calculated that the demographic peak year of the Greatest Generation was 1930, just after the start of the Great Depression.
The generation that followed, the Silent Generation, invested heavily in gold and achieved its apex in 1974, which coincided with the 1973–1974 market crash.
After that, baby boomer investors no longer saw gold as a safe asset. Instead, they favored equities, investing in Walmart, Circuit City, and Home Depot, among other companies, that enabled their consumer culture. The baby boomer cohort reached its peak in 1999, according to Lee, at the same time that the equity market achieved a new summit.
Generation X embraced the Internet’s potential to connect people and facilitate transactions. Anyone who invested in Amazon in 1999 has enjoyed returns far exceeding those generated by the S&P 500.
But what would it have taken to identify Amazon as one of 1999’s best investments? “That decision should never have been made because you thought you knew a great analyst that could tell you how next quarter was going to look,” Lee said. “You never would have held it long enough if you were just following an analyst. You had to basically believe in a demographic or structural reason to be long Amazon.”
The millennial generation will move the market next and investors need to examine their preferences carefully.
Lee expects the coming demographic shift will mean increased investments in digital assets and cryptocurrencies. Such securities have been at the center of a polarizing debate with many questioning their utility as financial instruments since they are not backed by tangible assets.
Digital assets are new and unorthodox, Lee acknowledged, but that is hardly disqualifying. Many of the rules of finance memorized by business school graduates no longer seem to apply in today’s financial system, he said: The majority of 2018 initial public offerings (IPOs) were made by unprofitable enterprises, public markets are shrinking relative to private equity investments, and bonds are being issued with negative interest rates.
“People tend to think rules don’t change, but in financials, they’ve clearly evolved,” he said.
Investments in companies like Facebook, Amazon, and Netflix have become increasingly abstract. “If you controlled Facebook and liquidated it, you’d get three cents on the dollar on tangible assets,” Lee said. “Most of what you buy today in equities is intangible anyways.”
Meanwhile, vast amounts of money are moving through bitcoin’s blockchain, and today bitcoin is actively used as a settlement network for large transactions.
“If you think bitcoin is irrelevant in terms of moving money,” Lee said, “Paypal and Discover are even more irrelevant, because bitcoin is moving multiples of what they’re actually moving today.”
Though bitcoin and other cryptocurrencies are subject to considerable speculative activity, Lee doesn’t think that poses a problem. By measuring the value of bitcoin trades on exchanges as a proxy for speculative activity against the value of bitcoin transactions conducted on the blockchain, he found $2.50 of speculative activity for every $1 of transactions.
Lee compared that to global oil consumption, $2.6 trillion, versus the $81.2 trillion in speculative oil trading that takes place on commodity exchanges. “Bitcoin could have a 10-fold increase in speculation and it would only match what’s happening in commodity markets,” he said.
Digital assets may be trading more frequently and at higher prices because millennials have become a larger part of the workforce. Their investment preferences are directing an increasing percentage of capital flows. Millennials are expected to control a total of $7 trillion in total liquid assets by 2020, according to Lee.
He believes their willingness to embrace technological solutions, favoring phone apps over traditional bank branches, for example, means that millennials could place 10% of their assets in crypto investments. That could mean a market capitalization of $700 billion.
“They are seeing technology and banks and storing value on a phone as the same,” Lee said. They may end up redefining the traditional boundaries of investing.
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Peter M.J. Gross is an online content specialist for CFA Institute, where he has managed blogs for the CFA Institute Annual Conference, European Investment Conference, and Middle East Investment Conference. Previously, he worked at Hampton Roads Publishing Company and at MFS Investment Management. Mr. Gross’ articles have been published by Enterprising Investor, City A.M., Seeking Alpha, and The Hook, and his work has been highlighted by Real Clear Markets. He holds a BA degree from Connecticut College.