This line is of course from the 1939 movie classic, The Wizard of Oz. We were all entranced as Dorothy, the Lion, Tin-Man, and the scarecrow defeated the Wicked Witch of the West only to have Toto the dog pull the curtain away revealing what sounded like an all-powerful wizard to be an ordinary little man using a machine to sound better. When Dorothy notices what’s really happening here, she is told not to pay attention to him.
Governments around the world want you to not pay attention to them as the wizard. By printing money in country after country and by keeping interest rates low, the government-wizard is doing all things possible to entice you to spend, baby spend. In the meantime, you know you haven’t saved enough so you are not in the mood to spend. You on board do save, baby save. Further, you are beginning to see some cracks in the rhetoric. Recently it was just Greece in the headlines. Now it’s not just “gold that is in its worst slump since 1996,” according to CNNMoney, “nearly all major global industrial commodities are back to 2009 levels – including coal, gas, oil, iron ore and copper,” according to YahooFinance. Then there is China’s import demand according to the World Bank was “noticeably weak in the first quarter.”
“If you can’t convince them, confuse them.” – Harry S. Truman
Rather than be confused or lost in headlines, allow me to help you separate the news from the noise. Kindly turn your attention to reading the economic tea leaves that makes a lot of sense to me. To get a handle on what’s going on, you may only need to look at ordinary people doing very predictable things as we go through the life cycle. As we have shown repeatedly, the primary driver to the US economy is the consumer. Economists don’t agree on many things, but what they do find in common is that 71% of spending in the US is driven by the consumer. To round out the rest, many economists agree that government accounts for 20% of GDP and business represents about 12% of total US spending. There are two categories of consumers to watch, the average and the wealthy. Think of the people in the Mid-West as representing average, as the 2013 median household income in America is about $52,000, according to the US Census Bureau. From the same source we can see that the median household income in Thousand Oaks is about $100,000. That’s not wealthy as the spending power for both groups is probably the same.
Here we have the years and the ages where the majority of Americans have been recently. The year of peak spending for furniture, for example, is 39 and the highest number of 39 year olds peaked in 2000. Average income and spending peaks at age 46 for the average American. This average group peaked in 2007. Average income and spending for the top 1-5% in this country occurs at age 53. The greatest number of 53 year olds peaked in 2014. Peak earning and spending happens later for this group because they spent the time to be better educated than the average American who started their first job at 20. What follows is this group tends to marry later and have children later. Notice spending on a moving forward basis. It appears to this observer that future spending starting at age 54, on average looks a lot like a waterfall. If you owned the stock or worked for Gerber, Wham-OO, Schwinn, Monopoly or Ford, for example, and the Baby Boom generation was working its way through the economy like an egg moving through a python, the companies that produced these products and services enjoyed unprecedented sales and success. Some of the same companies enjoyed increased sales but were not at all prepared for falling sales. They missed looking at the purchases of ordinary people buying in a very predictable pattern simply based on the American consumer buying habits at different ages.
“Never invest short and borrow long.” – Charles Schwab
That’s looking in your rear view mirror. Now look through your windshield at the future. In your mid-40s you spent every dime you earned or borrowed on the kids. Now the kids are grown and almost entirely gone. Baby Boomers born between 1946-1964 range in age from 51 to 69 this year. Please ask the question, what do they need to buy? Add ten years and ask the same question. My best answer is, outside of health care, buying with cash or credit is suddenly 100% optional. We have never been here before. Remember the popular 80’s bumper sticker, He who dies with the most toys wins! All of those toys were bought with credit not cash. With rates at historic lows, how much appetite do you have for credit today? The answer may be little or none. Since it’s not about the prediction and all about the preparation, kindly take the time now to prepare for the good, the bad, and the unforeseen.