What if stock markets don’t inherently go up in the long run? What if there’s a reason this only appears to be so? And what if that reason is about to reverse its effect on the stock market, sending it into a long-term bear market?

Yesterday’s Fortune & Freedom laid out the argument in detail. Today we begin providing the evidence.

But first, a quick reminder of our contention…

Stock market prices are set by supply and demand. But what determines supply and demand?

According to the life-cycle hypothesis, age does. You buy investments when you’re middle aged. And sell them in retirement. Thus, the number of middle-aged people gives you demand for investments and the number of retired people gives you supply of investments.

The thing is, these numbers are known decades in advance. Which should mean we can predict stock market prices over time. But that’s tomorrow’s pitch. Today, we look into a graphical explanation for how the key contention actually works.

The population pyramid scheme

Population pyramids are a graphical way of showing demographic information. They tell you how many people are in each age bracket, separated by gender.

Since recorded history, population pyramids have been shaped like… pyramids. Because of this, demand from the larger younger generations to buy investments outweighed the selling (supply) of older generations. There were more young savers buying investments than retirees selling investments.

That’s why prices rose – it’s basic supply and demand. The demand from a larger cohort of buyers outstripped the supply of a smaller cohort of sellers. This was especially true of the baby-boomer generation. A huge cohort of buyers unleashed a wave of demand that bid up markets. Retirees had comparatively little investments to sell.

But this state of affairs is about to change for the first time ever in the history of Western civilisation. The baby boomer generation is going to try and offload a huge amount of investments. But there aren’t enough buyers.

The kite problem

Population pyramids in many countries are no longer shaped like pyramids. At some point, there won’t be enough young buyers to buy all the investments that retirees plan to sell to pay for retirement.

If we take a look at population pyramids, this becomes obvious. A huge amount of retirees plan on selling their investments to a shrinking group of young working buyers. This simply won’t work. It’s basic supply and demand.

Japan’s population pyramid morphed from a pyramid to a kite over the last 50 years. It’s well ahead of the Western world’s demographic trend. And it’s the place where my prediction for the FTSE 100 has already played out. Stocks began a long bear market in 1989 that they still haven’t recovered from.

The UK was far behind in terms of demographics. But destiny, in the form of demographics and in the shape of a population pyramid, is catching up with us. If you look up the UK’s population pyramid, the number of buyers is narrowing relative to sellers. The imbalance between supply and demand is tipping. Instead of demand outstripping supply, supply is outgrowing demand.

To be clear, it’s not about the absolute numbers. You don’t need to match the number of buyers and sellers. The average buyer and seller transact different amounts, so it’s the total amount of buying and selling that matters to prices.

And it’s how the number of buyers and sellers are changing relative to each other which is the key to making predictions. Based on our population pyramid, the number of sellers will rise relative to the number of buyers in coming years. A growing number of sellers per buyer, in other words. And that means supply rising relative to demand. Hence lower prices.

I hope this gives you a feeling for the essence of my argument. But there is a more sophisticated way of displaying this same information. And the maths makes my conclusion clear. As well as predicting what happens next.

More on that tomorrow.

But first, what should you do about all this, presuming you agree?

Well, hoping that stockmarkets will go up in the long run is not going to work if they don’t. So diversifying your portfolio too much, to the point where it becomes a bet on the broader stock market rising “because it always has”, is the wrong strategy, in my view.

Instead, you need to make fewer, specific and targeted bets on companies that have the potential to outperform this malaise. But how do you find them?

We do it for you.

Nick Hubble
Editor, Fortune & Freedom