Dollars and Sense
Back to the Future: | |
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By |
Enough has been said in previous newsletters about the causes and effects of the US “bear market” that is now winding up. This is a good time to re-focus on the fundamentals that will drive the future of the various markets and, ultimately, affect our lifestyles. |
What lies ahaid ?
First, we must be clear about the key long-term fundamental trends in order to deal with temporary set-backs that inevitably come in the path of any goal. Then these setbacks can be treated only as opportunities to learn, adapt and/or to invest more.
Two excellent books, The Roaring 2000s (1) and Boomernomics (2), are recommended reading for those who want to understand the driving forces that will shape our future lifestyles and investment opportunities. The authors help us to understand those fundamental trends that can be reliably projected into the future.
The best leading indicator:
Why should we have faith in the trends, cited by many demographers, and the two authors being quoted? All are able to demonstrate with solid examples, that the best leading indicator for the North American economy is birth rates. That is how new generations are formed. And, simply put, people who consume in a predictable manner over the course of their lifetimes, drive our economy.
Birth charts tell us decades in advance when each new generation of consumers will move through these predictable spending cycles. Dent coins the birth index: “sexual activity on a nine-month lag!” Thus, if you remember nothing else, remember this: sex drives our economy. (That’s probably why economists have never figured it out!)
Effect on Real Estate Values:
Demographers and futurists have been seeing and continue to project a steady decline in the market value of housing since it peaked in 1989. Sure, various strategic locations will enjoy temporary surges as new business activities attract large groups of people. But, when one looks at the significantly larger population of the “baby-boom” generation (born between 1947 and 1966) compared to the following much smaller population group, who is going to buy the very large number of homes owned by the “baby-boomers”? This is why the “experts” are forecasting a coming crunch in residential real estate.
Interest Rate Trends:
Another trend that has become apparent is the long-term decline in interest rates. This is happening because governments and the large baby-boomer population are getting beyond the years of deficit financing and borrowing. Hence, those depending on interest income to live on for many years in the future, may want to re-think their financial plans. In addition to declining rates, one must plan on the probability that inflation could reduce the spending power of their “nestegg” by up to 30% every 10 years. This is one reason why an article (3) in the latest AARP magazine stated: Avoid the stock market entirely and your wealth will slip away just as surely as if you’d bet it all on a failed dot.com.
How birth charts can forcast market activity:
© El Residente ARCR Administración S.A. San José, Costa Rica N.B. Like all information on the internet, this article may currently be incorrect or out of date.
North American birth charts show the number of births annually over many decades. Since each age group moves through predictable cycles, it should not be difficult to accept that family spending drives our economy. Then, it follows that spending should peak when the greatest number of consumers reach their peak spending years. (This is not rocket science here!)
Harry Dent (1) used a simple but very effective technique to try correlating birth charts and equity market activity. By taking an immigration-adjusted Birth Index, and simply lagging the information for the peak in family spending (at age 46.5), a spending wave projection was produced.
Now, when Dent superimposed a graph of the Dow Jones Industrial Index, adjusted for inflation, on this spending wave projection, it showed that there has been a surprisingly close correlation since 1953. A copy of this combined graph is available on request.
The good news is that the predictions suggest the next decade should provide us with an excellent opportunity - possibly the last in our lifetime - to enjoy solid investment returns in equity markets and build substantial retirement “nesteggs”.
As Harry Dent (1) says and William Sterling (2) reiterates, how and where we work and live is changing drastically due to the convergence and mainstreaming of the technologies, and the peak spending years of the aging baby boomers. This will result in nothing less than the greatest boom in history and an unprecedented opportunity for investors and entrepreneurs.
Are you ready?
(1) Harry S. Dent, Jr. The Roaring 2000s, Simon & Schuster, 1998 (2) William Sterling & Stephen Waite. Boomernomics, Library of Contemporary Thought, September 1998. (3) Stephen M. Pollan & Mark Levine. Money Forever, AARP Magazine, March/April 2001.
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