Bill Gross, Janus CapitalDemographics are likely to “dominate investment markets and returns for the next few decades,” Bill Gross argued in his latest investment outlook for Janus Capital.
The former PIMCO chief said aging populations will have a detrimental effect on developed economies, which are ill-equipped to deal with the “liabilities associated with the boomer generation: health care, private pensions, Social Security, and the unestimable costs of global warming.”
“The elderly… require more services and expenses than newborns,” Gross explained. As a result, the US—along with the rest of the developed world—face “dire” financial liabilities.
“Fact—the US government has current outstanding debt of approximately $16 trillion, or close to 100% of GDP,” Gross wrote. “The present value, however, of Medicaid ($35 trillion), Medicare ($23 trillion), and Social Security ($8 trillion) promised under existing programs totals $66 trillion, or another 400% of GDP.”
In other words, “we are broke and don’t even know it,” Gross said.
Part of the problem, Gross explained, is that there are too few millennials to take care of too many baby boomers.
“The elderly require more services and expenses than newborns.”“Future health care for boomer seniors can only be provided by today’s millennials and even doctors yet to be born,” Gross wrote. “We cannot store their energy today for some future rainy day. Nor can we save food, transportation, or entertainment for anything more than a few years forward. Each of these must be provided by a future generation of workers for the use of retired boomers.”
While Gross noted that having more babies would “turn the trick,” pivoting assets to the developing world is also an option.
“If much of the developing world is younger demographically,” he wrote, “then developed nations could and should transfer an increasing percentage of their financial assets to emerging markets to help foot the demographic bills back home.”
Specifically, Gross suggested increasing asset allocations to developing countries over the long term. Other investment recommendations included going long inflation and short fixed coupons—as “higher millennial wages are the probable result of a shortage of health care workers relative to boomer requirements.”
The health care sector should thrive, he predicted, while “liability-handcuffed” organizations such as insurers and underfunded states and municipalities have a poor outlook.
“It seems demographically commonsensical that boomers have in part been responsible for asset appreciation during the heyday of their productive years and that now, drip by drip, year by year, they will need to sell those assets to someone or some country in order to pay their own bills,” Gross concluded.
Related: Bill Gross: Death Is Inevitable for the Bull Market & Investing in Demographics