An economic tsunami is coming – prepare for this perfect storm – your lifestyle depends on it!
America is at a crossroads. Economic fundamentals, market cycles, and demographic trends are converging and threatening the long-term economic prosperity that Americans have grown accustomed to. The combination of baby boomers going through their peak spending years, a record number of Americans retiring, and a government in crisis over how to pay for it is creating a storm of epic proportions that will affect their way of life. Few will see it coming, but those who are prepared will prosper, while those who are not will suffer tremendous financial and personal hardship. Your financial well-being and ultimately your way of life depend on you being prepared for the subsequent economic Tsunami, this Perfect Storm.
Soon enough, the 78 million baby boomers will pass their peak spending years and retire. This is an important moment because America is a nation driven by consumer spending. Personal consumption, or what people do as consumers, accounts for more than 70% of the nation’s Gross Domestic Product (GDP) and the way people as consumers spend their money is the biggest influence on our economic health. Times of economic boom are associated with a growing population size in the mid-forties, because this is the age that people spend the most, and times of downturn are associated with a decreasing size of this population. As larger groups of consumers age and spend more, the economy grows. In turn, when these groups pass their peak spending years, the economy slows … dramatically.
Graphs 1 and 2: Change in family spending at each age
As you can see from the charts above, people spend money in very predictable patterns, at very predictable times in their lives. These spending patterns directly impact our economy, business, and product trends. Everything from the demand for potato chips and real estate to inflation rates, economic growth, immigration rates and national migration, locally, nationally and globally are affected. By analyzing this information, we can successfully forecast how spending will change in the coming years and decades. Economists will continue to worry about “too widespread” consumers and the dire consequences that lie ahead; however, the boom in consumer spending will continue until baby boomers see their children finish their high school years and move out. How do we know all this? Demography!
Demographics – The Ultimate Forecasting Tool:
Demographics are targeting the finest consumer segments by age, income, and lifestyle, right down to zip codes and neighborhood blocks. It predicts what new generations of consumers will do as they age and similarly can help us see the key trends that will affect our future decades in advance. The life insurance industry was the first to use this data to make actuarial predictions, to assess risk when creating life insurance policies.
The study of how demographics can be used to predict stock market trends was pioneered by renowned economist Harry S. Dent Jr., founder of the “Dent Method,” an economic forecasting approach that applies fundamental demographic trends to factors key economics. Dent has the only documented track record of success in predicting long-term economic trends.
As we see in Figures 1 and 2, people do predictable things as they age. Between the ages of 18 and 47 we go through various stages of life. From entering the workforce between the ages of 18 and 22, to marrying between the ages of 22 and 30, the spending cycle accelerates with the apartments and new stores that these new homes generate. The kids soon follow us and then we buy our first home between the ages of 31 and 42, the stage where we incur the most debt, and we buy the most potato chips because their 14-year-old is eating it. out of home. Our spending continues to increase as we buy our next home, more furniture and cars, etc. until about age 47, when our children reach their late teens and still live at home.
When we reach 50, the children leave home. At this point, in addition to the dream car at 54 and expensive wine at 56, we began to spend less, pay off debt, and save more for retirement. After age 50 we tend to reduce spending for the rest of our lives, allowing savings and investments to grow. Income does not decrease, but expenses usually do. The maximum investment rate generally occurs at age 54, which continues until retirement around age 63. Net worth generally peaks right after death, currently 78. With quantifiable data on all the key things we do as we age, trends are largely predictable decades into the future, locally, nationally, and world.
Consider the following events that seemed to seriously derail the economy, but couldn’t!
Did we go through these incredible hurdles and yet spend more? These disasters and threats are not what we base our spending decisions on. Families have needs that must be addressed regardless of current market conditions. Age and stage of life determine spending patterns. As we go through stages of life that correspond to different ages, we change our expenses in very predictable ways. What we buy at each stage is predictable and consistent. This information can be used to forecast how spending will change in the coming years and decades. To see the actual stages of population spending, we must look at the Adjusted Birth Rate.
Birth rate and immigration: the adjusted birth rate
Spending cycles can be predicted by advancing the birth rate (adjusted for immigration) by the appropriate number of yours to correlate with the size of the population in the late 1940s.
If we plot the size of the late 1940s group with the projected year, we see the upward trend of peaks and troughs in spending due to past variations in the birth and immigration rates (Figure 3). For example, fewer babies were born during the Great Depression than before or after. So we would expect that 48 years later (during the 1970s) there would be fewer middle-aged people, hence the stagnant 1970s.
Figure 3: Generation cycles: immigration-adjusted birth rate
As you can see from the graph above, Generation X (the children of baby boomers) are just 1/3 the size of the Baby Boomer generation (1946-1964). We bear witness to a very alarming fact; Physically there are not enough people in Gen X to keep up with the spending pace set by the Baby Boomers! To see its impact, we must look at The Spending Wave.
The spending wave
The effect of people in their peak spending years is seen within the spending wave. The chart below illustrates the birth rate as we advance 47 years to our maximum spending age.
Figures 4 and 5: The spending wave and generational spending trends
An economic boom is not only created by increased spending (demand), but also by the simultaneous increase in productivity (supply) of an efficient maturing generation. This results in higher stock prices from higher earnings and rising valuations, along with low inflation. When they leave the workforce, they are replaced by a less efficient workforce, leading to decreased productivity with rising inflation. The next cycle occurs once the spenders are gone, leading to declining prices for goods and services, causing deflation.
When the massive Baby Boomer generation finally passes their ‘peak spending years, spending will slow down, earnings will decline, and stock valuations will drop dramatically.’ We’ve already seen this effect in real estate, which probably won’t pick up until 2012-2015 when Echo-Boomers start buying their first homes. There are simply not enough people to absorb the current generation households. To make matters worse, retired boomers will live off their assets and subsequently sell assets in a declining market, forcing them to sell more for the same amount of money. Add in a Social Security and Medicare system that will be beyond its breaking points to cater for this surge of retirees, and the government will be forced to raise taxes regardless of who is in the White House … A perfect storm.
Why does this matter?
When managing your finances, it is important to have a reasonable idea of what your expenses will be, especially in retirement. How will economic and demographic trends and inflation affect those expenditures? A financial plan that assumes an increase in consumer prices will look very different from one that assumes that prices are stagnant or declining. A portfolio of bonds and cash would be decimated by a period of prolonged inflation, but it would be highly profitable during a deflationary period. On the other hand, a portfolio of stocks and commodities should perform relatively well to keep pace with inflation, but would be catastrophic during a period of deflation. Naturally, having a viable economic forecast that takes these factors into account is an essential part of building your financial plan.
The most important financial decision you will make in the next ten years will be your money management style and the asset allocation you choose as our business cycles change. Choose wisely and you can enjoy the products and services you buy at a lower cost, while watching your savings grow. Make the wrong choice and your savings will decline and you will see your purchasing power erode. A real personal perfect storm. In the resulting bear market, millions of Americans will lose their life savings, don’t be one of them.
Be the expert … or hire one!
Personal finances are serious business. When planning your life, and especially your money, you must master the fundamentals and dedicate your entire life to staying up-to-date on the subject, just as we have. With the proper preparation and advice, you will be able to better understand the nature of the problems that lie ahead and that will be essential to preserving and even increasing your wealth. For a complimentary review of your finances and to ensure that you are financially prepared for the drastic economic and demographic changes ahead, contact me today.
In conclusion
As my longtime clients will attest, I am not a perpetual bear, pessimist pessimist, or disbeliever in the American way. On the contrary, I have been optimistic for most of my 25 years in the industry. I believe America is the greatest nation the world has ever known and there is nothing in our future that we cannot overcome. Naturally, I hope these predictions are wrong, but we just can’t take a chance and be unprepared. The media wants you to believe that headlines move the markets, and no one knows what the next “biggest thing” for the media will be. What I do know is that no matter how powerful wars, hurricanes and oil spikes are, the spending cycle will continue to dominate the economy. When the baby boom ends, it will be vital to your lifestyle that you know when and what to do, as well as how to invest to protect yourself and your family, and take advantage of it. Regardless of economic conditions, we will be prepared for our clients.
Visit
