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I think that demographics plays a major role. It is in the background.

[NOTE: Mike is our expert on demographics.]

The Baby Boom generation is highly skilled, highly paid and moving toward retirement. I believe that this is behind the steady expansion of multiples that we have seen in the stock market. In addition, there is a part of the expansion that is related to the perverse supply and demand characteristics of financial instruments. Rising prices make stocks more attractive, which causes prices to continue to increase for a long period of time.

This competition for investment dollars has a two fold effect. Because of high stock prices, it forces long-term investment returns downward. Because of low investment returns when compared with historical norms, many Boomers will delay their retirements.

These delays will mitigate the negative effect of Boomer retirements. This invisible hand will mitigate one of today's greatest economic concerns looking forward: that there will be too few workers to support the elderly. The elderly will be working.

More precisely, many Boomers will work longer than people from previous generations.

Looking at economic issues, today's job market has a surplus of highly qualified workers. This has reduced the pay of Boomers in view of their skills. But it has improved the health of the economy overall. We see this in the extremely mild recessions of recent years and in very low unemployment rates.

Because many Boomers will remain on the job, today's strong economy will continue to be strong much longer than most people expect. Productivity will remain high longer. Corporate earnings will continue to be healthy.

Dividends should be secure. We can expect them to rise.

Stock multiples are unlikely to continue expanding as stocks fail to deliver returns far above historical norms. Most likely, stock multiples will contract as Boomers look for better returns elsewhere, following paths laid out by salesmen. This will hurt stock prices. It will not hurt earnings. It will not hurt dividends.

Have fun.

John R.

Not only am I in screaming agreement with the previous post - added competition(Wall Street feeding the ducks) is showing up in new commodities products(PCRIX et al) and the latest cycle of falling dollar/invest oversea's media coverage(tout's???).

I confess to looking.

Good points JWR!
Happy to see MRK back at my buying price by the way - cheers!

Here are links to three columns by John Mauldin addressing the demographics issue:

1) Demography Is Destiny

http://frontlinethoughts.com/article.asp?id=mwo103103

2) The Super Trend Puzzle

http://frontlinethoughts.com/article.asp?id=mwo013004

3) The Coming Generational Storm

http://frontlinethoughts.com/article.asp?id=mwo040204

Because many Boomers will remain on the job, today's strong economy will continue to be strong much longer than most people expect. Productivity will remain high longer. Corporate earnings will continue to be healthy.

Physical abilities tend to decline with age in most people.

I expect companies to become more responsive to the needs of their older employees after the Boomers start retiring in mass.

There are lots of win-win combinations with many jobs. For example, companies have learned that outsourcing certain jobs reduces their break even point. Some have made arrangements with their previous employees to work as favored consultants. They offer high dollar amounts when there is work to compensate for those other times when there is none.

I have seen cases in which outsourced jobs were selected for people eligible to receive an immediate retirement annuity. The company's costs for retirement benefits were reduced because people retired earlier than normal. But the new retirees had an opportunity to make up the difference many times over as long as the company continued to win contracts. Fewer reductions in force in hard times, more money to individuals in good times.

I do not expect to see a lot of this immediately. But I think that more retiree friendly opportunities will exist in the not-too-distant future.

I expect to see companies make special arrangements along these lines to help with the physical limitations of older workers and new retirees.

Have fun.

John R.