The passification of Germany and how to make money from it
Lots of the younger generations have issues with boomers. Youth having problems with their parents is a tale as old as time, but outside of their generation the boomers have like a 10% favorability rating, and that might be high.
If you went and asked 1,000 people between the ages of 20 - 45 why they disliked boomers they’d give 1,000 different reasons but they almost all boil down to one key thread, risk. See Boomers were born during a period of massive economic expansion, first due the post war impulse, then tech advancement, followed by the opening of the soviet bloc and then China for consumption, and were mostly all young enough to not see their entire retirement plans get destroyed during the Great Financial Crisis, and have enough assets left over that they were able to more than recover in a little more than a decade.
This sequence of events is almost unprecedented and you have to back to the period of time like post black plague England to see similar levels of total economic upward mobility. Ease of mobility led to the lack of risk taking.
“Go work for a good company for 40 years and you’ll have a great life, no need to job switch”
“Just buy a house that’s all you need to do to get rich”
“Work hard at something you love and you’ll be rewarded”
These and other generalized statements about how to lead a successful life don’t work for the youth. Not that there isn’t some truth to them, but that they betray an inability to understand the need to take risks. The boomers didn’t need to take risk because the economy was expanding no matter what they did. They could work at the same company for 40 years because sales went from 800k a year to 8b a year, and their salary went up with it. Buying a house was a great financial investment because the downpayment was so low (and the interest payment was so high) and now the opposite is true, increasing the value of the home. You could work whatever job you liked because even if you were an art teacher, well the guy next door has seen a 10x increase in salary the last 20 years, so your prices could go up 7x without issue. So ya, do what you love.
See in (almost) every generation there is a central truth, in order to get ahead you need to take on risk, be an incredible saver, or get extremely lucky. You cannot just exist. That wasn’t true for the majority of boomers. They could live almost whatever life they chose and are now retiring with record levels of relative wealth. This has perverted their advice, because instead of it being ‘hey you need to try to start your own business/side income’ or ‘save 40% of your paycheck’ or ‘take as many shots as you can as that’s how you create luck’ its more akin to ‘just keep your head down and show up at the office, you’ll do great’. The latter of which just isn’t actionable if your goal is to move up in social class, the youth are back to the historic norm, that they need to take some risk to move up. It’s why the youth generally dislike the boomers, they think that its the boomer’s fault that life isn’t as easy, and that isn’t true. The boomer’s economic set up was the abnormal one, and (broadly) its made many of them comfortably lazy who hate taking risk, now the world is just moving back to normal.
Europe is a continent of that boomer mindset.
Germany is a prime example of this mindset. Their citizens don’t need to take much risk because of their pension system. Between their fantastic government employee pension system (Gesetzliche Rentenversicherung) their minimum 15% employer match 401k-esque (but still a pension) system (Betriebliche Altersvorsorge - bAV) or their heavily tax subsidized private pension system (Private Vorsorge) almost 88% of all workers in Germany are covered by one of the three pension types.
This has short circuited risk taking. As there’s been no need to take any. If you’re a German, your retirement is mostly covered by the pension, so as long as you have enough money to fully pay off your home before you get to the end of your working years and your kids are out of the house you and your spouse can enjoy your time together.
This lack of risk taking has led to the middle aged and older generations of Germans having their money concentrated in deposits at banks or life insurance, with a significantly lower share in capital market instruments like stocks. There is no need for any risk if again their pension is covering most of it.
The system has worked for decades, led by the Gesetzliche Rentenversicherung pension. Which is pay as you go system. Similar to the United States social security this pension plan has the youth pay in so that the retirees can get paid. While there has been a lot of spilled ink about how these types of systems are fraught with huge dangers they work as long as the population is having kids, and the social services safety nets aren’t taken advantage of. Except Germans are having less kids.
This is causing something akin to a crisis of faith, as one of the pillars of the German pride, that they take care of their own, might be crumbling under its own weight due to the demographic shifts of the country.
The government is aware of this and trying to fix it. They’re trying to create a more capital funded system with individuals saving more for their own retirements. Some of these processes are just beginning. The first step is their recent creation of a sovereign wealth fund. The government is taking out a loan of €12.5b in 2025 to establish the fund and their goal is to have the fund be worth €200b in 2036, roughly growing at 43% annually for the next 11 years. This plan called “Generation Capital" or ‘Generationenkapital’ in German is intended to stabilize the general pension and hopefully will be growing well enough to make a distribution of 5% or €10b annually to backstop the pensions by 2036.
This shift to a more capital funded approach (punting on stocks) vs just buying long term debt to fund the system will have two effects right away. First, it will lower the demand for the long end world wide, pushing break even yields higher and higher. Potentially explosively higher if other heavily pensioned countries switch to a similar way to juice returns.
The second shift would be that now there’s a lot more money in domestic markets in Europe. Money that wants stocks to go up.
The next thing the government is trying to do is get more private pensions to follow suite and use the stock market to juice returns and get more buy in from the public. The German Federal Ministry of Finance has recently published a draft bill to “fundamentally reform” the tax supported private pension provisions. Refenceing the Vorsorgedepot/New Subsidized Products the central goal is reframe the private pensions as deposits without a guarantee. Employees would get a greater tax deduction from contributing to this plan. A huge one. In fact, almost a 50% increase instantly upon passage and another 20% before the end of the decade. Employers would also see a greater tax savings from using this pension plan over other less risky ones.
All of this is to get the public to buy into being comfortable taking risks on their own. To de-boomerfy their country. In America these plans are called 401k’s (or 403b’s), this gets the public interested in stocks going up. Stocks going up means people are richer. At least on paper. They feel richer. They then go out and spend money. Causing a psychological factor (them feeling rich) to weirdly enough making them richer as companies see earnings growth move higher.
Meanwhile the US market becomes more and more insulated from day to day issues as passive buyers (via retirement funds) become larger and larger holders of stocks.
The German Stock institute is very excited about all of this. As they know what every investor knows, most people only invest in things they know about. The German public might invest some money abroad, but a large chunk of money will stay in domestic listings. That will cause multiples to expand on the German Dax, and suddenly not just SAP will trade with a close to US listing multiple. Their hope is that their market will also become less boom/bust-y as the passive owners start taking over. That the risk taking in the stock market will in turn filter back to the real world economy where people will feel more comfortable spending money and growing themselves out of what has been an anemic economy for the most part of the last 17 years.
This isn’t without risks. As much of the USA’s growth in multiples and EPS has been because of the innovation due to the tech sector (which has then filtered through to the rest of the country). The US utilities trade higher because there is more energy demand in the areas they service due to this tech sector demand, not because just raw multiple expansion. If they have the same demand loads as German ones they would likely trade at similar multiples.
Just forcing the German public into the markets is a little bullish, but they need to have some sort of innovation or industrial growth on top of that.
This plan also would destabilize how the German government works. As their government would now need to be much more aware of how their decisions impact their domestic market. Trump backed off his hard-line tariff stance almost immediately when the US domestic stock market collapsed. The German government has spent the last seven years decommissioning many of their nuclear energy generator plants for solar and wind power sources. While both the tariff situation and pivot to wind/solar might be what’s best for the country in the long run its very bad for stocks in the short run. This short circuits how the government is able to operate, and given that their parliamentary system of government is fractured right now, market instability could bleed through and create instability in the government.
My point is there are real risks to trying to inject risk into a system that has basically been without it in any real way for almost five generations. That being said if German is successful their stock market is going to be on fire the next few years. The economic growth that comes from it will in turn further benefit their country. Real Estate prices in the EU might start to skyrocket because of this, breaking that down cycle as well. The entirety of the EU might benefit from this change.
That upside is worth having some exposure to. Given that these changes that the Germans are making are at their core financial ones, I think their domestic banks will be huge winners with my favorite being Deutsche Bank (DB). Even after a massive move ytd it still trading under book value and I think it will see accelerated movement to the upside if the German piece of their book starts to grow in a real way.
There might be better ways to have exposure to changes that German is trying to make to de-boomerfy their population by improving their financial markets and economy, but I like DB. I think this is a trend worth having exposure to, as its still very early innings and it has their government’s support. Until that changes their market should do well long term.
Just some food for thought while the US markets are closed on its birthday. Have a great 4th of July weekend and I’ll be back on Sunday with some thoughts on the BBB, NFP numbers and some new software longs.
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$Stoxx should perform well as a result