In my last blog, I mentioned I was reading a new book, hot off the press, and I STRONGLY recommend that you READ IT! It is called "The Sale of a Lifetime: How the Great Bubble Burst of 2017 Can Make You Rich" (It is currently sold out at Amazon because of its popularity but keep trying) by Harry S. Dent, Jr. Harry, a Harvard graduate, has written many books on the economy and his main theme is demographics. Demographics, the statistical data of a population, especially those showing average age, income, education, purchases, etc. He explains that there are cycles in human history such as I have discussed in a previous blog, such as the Kondratieff Cycle. The biggest impact of recent demographics is well known: the Baby Boomers! These are the people born between 1946 and 1964 who have had a huge impact on the economy and society. A book written in 1998 describes it well: "The Pig and the Python: How to Prosper from the Aging Baby Boom" (Amazon), by David Cork. The economy (the python) had to absorb a huge number of people (the pig) into the workplace in a very timely and predictable way.
Harry goes on to describe the impact of Baby Boomer aging on the economy. Back in the day, on average, we (I'm a classic Baby Boomer!) first rented apartments during our 20's, bought starter homes at a mean age of 31, utilized child care at the age of 33, traded up to a better home at age 41, paid for kids' college tuition at age 51, and bought a nicer car or second car at 54. Once we got rid of the kids, we started to purchase our vacation or retirement homes at age 65 and are taking cruises at age 70.
(Chart from The Sale of a Lifetime)
As we age our major costs will be prescription drugs at age 77 and finally nursing home costs at age 84. Something to look forward to? I can't wait!
Our peak in spending occurred at the age of 46 and it's been downhill ever since. We would expect the next generations to pick up the slack; the Gen. X'ers, and especially the Millenniums. But this hasn't happened. Although the number of Millenniums have equaled the Baby Boomers, they were "created" at a much slower pace and spread out over time, creating less of an impact than the Baby Boomers. Also, because of the massive amount of debt Millenniums have on their shoulders especially college debt, the timing of their purchase power has been spread out further. This causes a SNAFU in the handing over of assets to the next generation. There are fewer to purchase the homes (and furniture) owned by the Baby Boomers. There are not enough skilled workers to take over the workload of the Boomers (but I think this will be somewhat mitigated by the Boomers having to keep their jobs longer after the Crash!) Thus the strangled economy that progresses slowly and weakly.
Harry goes into much more detail but that is the gist of his theory.
The other fact that he is quite adamant about (that I have said before) is the amount debt we have on the books including governmental, corporate, and personal. This is occurring on a global scale. It is so out of proportion to our Gross Domestic Product (GDP or the amount of national production of goods and services), that when interest rates go up, so much of GDP will have to go towards just paying the interest on all this debt! So we have TOO MUCH DEBT!
But Harry describes that soon all this debt owed will be resolved one way or another (thus the bursting of the bubble). The debt will be: paid back, reduced to pennies on the dollar, or defaulted (as in home foreclosures). Most will be defaulted or not paid back. Nature has a way of "resetting" or putting everything back to zero to start again. In the following chart, we see U.S. debt to GDP ratio soar during the "Roaring 20's" only to drop precipitously off a cliff during the Great Depression. Look at our debt levels now!
The rule is that any bubble (and this REALLY is a bubble) tends to return to the start of itself. You can see it in the chart.
So when the bough breaks (and it will soon), regretfully, both sides lose. The debtors, the ones who owe the debt, might end up losing their homes, their cars, whatever they used for collateral. The creditors, the ones who hold the mortgage or car loan, lose the money that they loaned. What bank wants a used home or car that they know they will never get their money back from? We got a taste of what's to come in "the Great Recession" of 2008! The correction to come was waylaid by the government by bailing out the banks and car companies. The amount of debt correction that needs to occur will NOT be bailed out the next time. There's too much of it!
The lesson here for us is that we need to look at our means of income and how secure it will be in a severe downturn, the amount of debt we owe, and the ability to ride out the storm. Each individual is in a different place but having sound finances (money put away for a rainy day, as they say) and forgoing putting oneself further in debt makes sense. Remember, the title of the book? The "Sale of a Lifetime"? By waiting to purchase that next house, car or other luxury item, you will be paying 10 cents on the dollar. I will expound on this in blogs to come!
Harry goes on to talk about bubbles.... Stay tuned! (and BUY THE BOOK!)
Best regards,
Ken Knight
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