By Keith Springer
America is at a crossroads. Economic fundamentals, market cycles and demographic trends are all converging that threaten the long term economic prosperity to which we Americans have become accustomed. The combination of Baby Boomers passing their peak spending years, a record number of Americans retiring and a government in crises over how to pay for it, is brewing up a storm of epic proportions which will affect the way you live. Few will see it coming, but those that are prepared will prosper, while those that are not will endure tremendous financial and personal hardship. Your financial well being and ultimately your way of life depend on you being ready for the ensuing Economic Tsunami, this Perfect Storm.
Very soon, the 78 million baby boomers will pass their peak spending years and head into retirement. It's an important time because America is a nation driven by consumer spending. Personal consumption, or what people do as consumers, represents over 70% of the nation's Gross Domestic Product (GDP) and how people as consumers spend their money is the largest influence on our economic health. Economic boom times are associated with an increasing size of the mid-forties population, because this is the age people spend the most, and bust times 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.
Charts 1 & 2: Change in Family Spending at Each Age
As you see in 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 domestic migration - locally, nationally and globally are affected. By analyzing this information we can successfully forecast how spending will change in the years and decades to come. Economists will continue to fret about the "over-extended" consumers and the dire consequences to come, 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? Demographics!
Demographics - The Ultimate Forecasting Tool:
Demographics target the finer segments of consumers by age, income and lifestyles all the way down to zip codes and neighborhood blocks. It predicts what new generations of consumers will do as they age, and it can similarly help us see key trends that will affect our future decades in advance. The life insurance industry was the first to use this data for 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 key economic factors. Dent has the only documented record of success at forecasting long term economic trends.
As we see in charts 1 & 2, people do predictable things as they age. Between 18-47 we go through several stages of life. From just entering the workforce at 18-22 years of age, to getting married between ages 22-30, the spending cycle is accelerated by the apartments and new stores that these new households generate. Children soon follow and we then purchase our first home from about ages 31-42 - the stage at which we incur the most debt - and buy the most potato chips because your 14-year old is eating you out of house and home. Our spending continues to increase as we purchase our next home, more furnishings and cars, etc. until about age 47 as our kids reach their late teenage years and are still living in the household.
As we reach 50 the kids leave home. At this point, apart from that dream car at 54 and the expensive wine at 56, we begin to spend less, paying down debts, and saving more for retirement. After age 50 we tend to reduce spending for the rest of our lives, allowing growth in savings and investments. Income doesn't decrease, but spending usually does. The peak rate of investment generally occurs at age 54, which continues into retirement at around age 63. Net worth typically peaks just after age of death, currently 78. With quantifiable data on all of the key things we do as we age, trends are largely predictable decades into the future - locally, nationally and globally!
Consider the following events that looked like they would seriously derail the economy, but couldn't!
do we go through these incredible obstacles and yet spend more? These disasters and threats are not what we base our spending decisions on. Families have needs that must be taken care of regardless of the current market conditions. The age and stage of life determine spending patterns. As we move through stages of life which correspond with different ages, we change our spending 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 years and decades to come. To see the actual spending stages of the population, we must look at the Adjusted Birth Index.
Birth Rate and the Immigration: The Adjusted Birth Index
Spending cycles can be forecasted by moving forward the birth index (adjusted for immigration) by the appropriate number of yours to correlate with the size of the late forties population.
If we plot the size of the late forties age group with the projected year, we see the rising trend of peaks and troughs in spending due to past variations in birth and immigration rates (Chart 3). For example, fewer babies were born during the Great Depression than either before or afterward. Thus, we would expect that 48 years later (during the 1970's) there would be less middle age people, thus the stagnant 1970's.
Chart 3: Generation Cycles -- Immigration-Adjusted Birth Index
As you can see in the chart above, Generation X (the baby boomers' children) are barely 1/3 the size of the Baby Boomer generation (1946-1964). From this we bear witness to a very alarming fact; there just physically are not enough people in Generation X to keep up the pace of spending 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 viewed within the spending wave. The chart below illustrates the birth index when moved forward by 47 years to our peak age of spending.
Charts 4 & 5: The Spending Wave and Generational Spending Trends
An economic boom is not just created by the rise of spending (demand), but also the simultaneous rise of productivity (supply) from an efficient maturing generation. This generates rising stock prices from higher earnings and rising valuations, along with low inflation. When they leave the workforce, they are replaced with a less efficient workforce which leads to decreasing productivity with increasing inflation. The next cycle occurs once the spenders are gone, leading to decreasing prices for goods and services causing deflation.
When the massive Baby Boomer generation finally passes its' peak spending years, spending will slow, earnings will decline and stock valuations will fall dramatically. We have already seen this effect on real estate, which likely will not rebound until 2012-2015 when the Echo-Boomers begin to buy their first homes. There are just not enough people to absorb the homes of the current generation. To make matters even worse, retiring boomers will be living off of their assets and subsequently selling assets in a declining market, forcing them to sell more to just to get the same amount of money. Add in a Social Security and Medicare system that will be beyond their breaking points to service this swell 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?
In 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 expenses? A financial plan that assumes rising consumer prices will look very different from one that assumes stagnant or falling prices. A portfolio of bonds and cash would be decimated by a period of prolonged inflation, but it would be very profitable during a deflationary period. On the other hand, a portfolio of stocks and commodities should do relatively well in keeping 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 single 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 economic cycles shift. Choose well and you will be able to enjoy the products and services you buy at a lower cost, while watching your nest egg grow. Choose poorly and your nest egg will decline and you will see your purchasing power erode away. A veritable personal Perfect Storm. In the ensuing Bear Market, millions of Americans will lose their life savings - don't be one of them.
Be the expert.....or hire one!
Personal finance is serious business. In planning your life, and especially your money, you need to get the fundamentals down pat and spend a lifetime keeping up on the subject, just as we have. With the right preparation and advice, you will be able to better understand the nature of the problems ahead that will be essential for preserving and even increasing your wealth. For a complimentary review of your finances and to ensure you are financially prepared for the drastic economic and demographic changes ahead, contact me today.
In Conclusion
As my long time clients will attest, I am not a perpetual Bear, a doom and gloom pessimist or a non-believer in the American way. To the contrary, I have been Bullish 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 simply cannot take that chance and not be prepared. The media would have you believe that headlines move markets, and nobody knows what is going to be the next "most-important-thing-ever" to the media. What I do know is that, as powerful as wars, hurricanes, and oil spikes might be, the spending cycle will continue to dominate the economy. When the Baby Boomer boom ends, it will be vital to your way of life that you know when and what to do as well as how to invest to protect yourself and your family, and to profit from it. Regardless of the economic conditions, we will be ready for our clients.
America is at a crossroads. Economic fundamentals, market cycles and demographic trends are all converging that threaten the long term economic prosperity to which we Americans have become accustomed. The combination of Baby Boomers passing their peak spending years, a record number of Americans retiring and a government in crises over how to pay for it, is brewing up a storm of epic proportions which will affect the way you live. Few will see it coming, but those that are prepared will prosper, while those that are not will endure tremendous financial and personal hardship. Your financial well being and ultimately your way of life depend on you being ready for the ensuing Economic Tsunami, this Perfect Storm.
Very soon, the 78 million baby boomers will pass their peak spending years and head into retirement. It's an important time because America is a nation driven by consumer spending. Personal consumption, or what people do as consumers, represents over 70% of the nation's Gross Domestic Product (GDP) and how people as consumers spend their money is the largest influence on our economic health. Economic boom times are associated with an increasing size of the mid-forties population, because this is the age people spend the most, and bust times 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.
Charts 1 & 2: Change in Family Spending at Each Age
As you see in 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 domestic migration - locally, nationally and globally are affected. By analyzing this information we can successfully forecast how spending will change in the years and decades to come. Economists will continue to fret about the "over-extended" consumers and the dire consequences to come, 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? Demographics!
Demographics - The Ultimate Forecasting Tool:
Demographics target the finer segments of consumers by age, income and lifestyles all the way down to zip codes and neighborhood blocks. It predicts what new generations of consumers will do as they age, and it can similarly help us see key trends that will affect our future decades in advance. The life insurance industry was the first to use this data for 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 key economic factors. Dent has the only documented record of success at forecasting long term economic trends.
As we see in charts 1 & 2, people do predictable things as they age. Between 18-47 we go through several stages of life. From just entering the workforce at 18-22 years of age, to getting married between ages 22-30, the spending cycle is accelerated by the apartments and new stores that these new households generate. Children soon follow and we then purchase our first home from about ages 31-42 - the stage at which we incur the most debt - and buy the most potato chips because your 14-year old is eating you out of house and home. Our spending continues to increase as we purchase our next home, more furnishings and cars, etc. until about age 47 as our kids reach their late teenage years and are still living in the household.
As we reach 50 the kids leave home. At this point, apart from that dream car at 54 and the expensive wine at 56, we begin to spend less, paying down debts, and saving more for retirement. After age 50 we tend to reduce spending for the rest of our lives, allowing growth in savings and investments. Income doesn't decrease, but spending usually does. The peak rate of investment generally occurs at age 54, which continues into retirement at around age 63. Net worth typically peaks just after age of death, currently 78. With quantifiable data on all of the key things we do as we age, trends are largely predictable decades into the future - locally, nationally and globally!
Consider the following events that looked like they would seriously derail the economy, but couldn't!
do we go through these incredible obstacles and yet spend more? These disasters and threats are not what we base our spending decisions on. Families have needs that must be taken care of regardless of the current market conditions. The age and stage of life determine spending patterns. As we move through stages of life which correspond with different ages, we change our spending 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 years and decades to come. To see the actual spending stages of the population, we must look at the Adjusted Birth Index.
Birth Rate and the Immigration: The Adjusted Birth Index
Spending cycles can be forecasted by moving forward the birth index (adjusted for immigration) by the appropriate number of yours to correlate with the size of the late forties population.
If we plot the size of the late forties age group with the projected year, we see the rising trend of peaks and troughs in spending due to past variations in birth and immigration rates (Chart 3). For example, fewer babies were born during the Great Depression than either before or afterward. Thus, we would expect that 48 years later (during the 1970's) there would be less middle age people, thus the stagnant 1970's.
Chart 3: Generation Cycles -- Immigration-Adjusted Birth Index
As you can see in the chart above, Generation X (the baby boomers' children) are barely 1/3 the size of the Baby Boomer generation (1946-1964). From this we bear witness to a very alarming fact; there just physically are not enough people in Generation X to keep up the pace of spending 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 viewed within the spending wave. The chart below illustrates the birth index when moved forward by 47 years to our peak age of spending.
Charts 4 & 5: The Spending Wave and Generational Spending Trends
An economic boom is not just created by the rise of spending (demand), but also the simultaneous rise of productivity (supply) from an efficient maturing generation. This generates rising stock prices from higher earnings and rising valuations, along with low inflation. When they leave the workforce, they are replaced with a less efficient workforce which leads to decreasing productivity with increasing inflation. The next cycle occurs once the spenders are gone, leading to decreasing prices for goods and services causing deflation.
When the massive Baby Boomer generation finally passes its' peak spending years, spending will slow, earnings will decline and stock valuations will fall dramatically. We have already seen this effect on real estate, which likely will not rebound until 2012-2015 when the Echo-Boomers begin to buy their first homes. There are just not enough people to absorb the homes of the current generation. To make matters even worse, retiring boomers will be living off of their assets and subsequently selling assets in a declining market, forcing them to sell more to just to get the same amount of money. Add in a Social Security and Medicare system that will be beyond their breaking points to service this swell 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?
In 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 expenses? A financial plan that assumes rising consumer prices will look very different from one that assumes stagnant or falling prices. A portfolio of bonds and cash would be decimated by a period of prolonged inflation, but it would be very profitable during a deflationary period. On the other hand, a portfolio of stocks and commodities should do relatively well in keeping 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 single 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 economic cycles shift. Choose well and you will be able to enjoy the products and services you buy at a lower cost, while watching your nest egg grow. Choose poorly and your nest egg will decline and you will see your purchasing power erode away. A veritable personal Perfect Storm. In the ensuing Bear Market, millions of Americans will lose their life savings - don't be one of them.
Be the expert.....or hire one!
Personal finance is serious business. In planning your life, and especially your money, you need to get the fundamentals down pat and spend a lifetime keeping up on the subject, just as we have. With the right preparation and advice, you will be able to better understand the nature of the problems ahead that will be essential for preserving and even increasing your wealth. For a complimentary review of your finances and to ensure you are financially prepared for the drastic economic and demographic changes ahead, contact me today.
In Conclusion
As my long time clients will attest, I am not a perpetual Bear, a doom and gloom pessimist or a non-believer in the American way. To the contrary, I have been Bullish 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 simply cannot take that chance and not be prepared. The media would have you believe that headlines move markets, and nobody knows what is going to be the next "most-important-thing-ever" to the media. What I do know is that, as powerful as wars, hurricanes, and oil spikes might be, the spending cycle will continue to dominate the economy. When the Baby Boomer boom ends, it will be vital to your way of life that you know when and what to do as well as how to invest to protect yourself and your family, and to profit from it. Regardless of the economic conditions, we will be ready for our clients.
