A popular point of view for some is that everything is fine. If there is a problem, it will be mild. According to me, that is wishful thinking. Rather than look at things through those rose colored glasses, it makes sense to me to prepare for the worst so we can do what is in our power to hope for the best. But when we prepare for the unthinkable it simply makes us better prepared for the good, the bad, and the unforeseen. That way you can have an attitude of “bull or bear, we don’t care.”
It may be better to be lucky than good, but we were one of the few firms in 2007 that warned investors that the grits may hit the pan. While many took note, some doubled down with more debt on more real estate. Starting in 2009 we went back to those who did not prepare at alland started the conversation with, “Do we have your attention now?” If you are looking at your life or family history with real estate, for example, I first want you to know that you are probably focused on the past 60 years. That’s half the story. It is my opinion that instead ofdrawing conclusions on an incomplete picture it is better to study the whole story. That’s 120 years of history in the USA. Please study this chart. Please answer these questions: How high on real estate would you have been if, for whatever might be the reason(s) it was under water, from 1890-1945? How many years was that? Who loved their neighborhoods Anywhere then? The other extreme is, in 120 years I count only one bubble! That 8 year period is the best we haveever seen it. That’s not a trend. That is an anomaly. We do know that All Bubbles Burst. 100% of the time. Thanks to HS Dent Research, when we study bubbles from the 1600s we find from peak to trough the decline was between 70-90%. This includes tulips in the Netherlands in the 1600s, the Dow 1929-1932, both Japanese real estate and stock markets about 1989-1996, and the NASDAQ 2000-2002. Remember where you read it first. If you think that equity may be useful to you to supplement your retirement income soon, now may be the best time to put paint on that (real estate) pig and sell it. Because you may wake up one day to see the reality that more people are dying than buying.
When it comes to earnings in this third quarter, the majority of reports have come in above estimates. But as compared to the past, the results are looking pretty dreary. To this observer the odds of a Santa Claus rally don’t look favorable. In 2013 holiday sales accounted for about $3-$4trillion or 20-40% of the retail industries total sales, according to the National Retail Federation. Gina Martin Adams of Wells Fargo Securities wrote 11/20/15, Yahoo Finance that with “90% of companies in the S&P 500 having reported for the third quarter, earnings are projected to fall 1.5% compared to one year ago.” This may mark the first quarterly decline since 2009. This would extend the so-called earnings recession to the end of this year.
Dear Reader, please study this chart. It may the most important one for you understand. If you have been following my articles you know that in my opinion the economy is a function of ordinary people doing very predictable things based on age. You now know that you consumed the most potato chips when you were age 14, that you bought the most potato chips for your children when you were the 42 year old average parent. I can well remember buying 1 to 3 bags of barbecue potato chips every day during middle school. This chart shows us a number of things. We see that at 39 that was the age that you bought the most furniture in your life. Let’s look at where we stand now.
To understand this new normal, thanks to Dent Research, there are two numbers you need to remember: 46 and 54.
46 is the age when people on average reach peak spending, after which it plateaus for a few years. Dent conducted a 10-year analysis many years ago that reached this conclusion. The US peaked in 46 year olds in 2007.
54 is the age that the 39-54 plateau ends. It’s also the year when the affluent – a smaller, more impactful subset of the overall group – reach their peak, and they’re doing so today. This group is significant as it may comprise 50% of all consumer spending. The US peaks in 54 year olds in 2015.
So it’s no coincidence that we saw a recession after late 2007 when the average baby boomer turned 46. Now, eight years later, the affluent boomer turns 54, when they come off that plateau and the affluent peak in earning as well as spending. This is also when auto sales , one of the few remaining bright spots in our economy , finally declines sharply.
But it’s the affluent sector that I’m most concerned about because they control so much of the spending – 50%! This was not the case in generation cycles before. But that changed heading into the bubbly late 1990s when they racketed up so much of the wealth, and wealth and income inequality became as severe as in the late 1920s bubble boom.
In 1989, spending by age in five-year cohorts (the best data we had back then) saw the biggest drop-off come between age 50 to 54. Now, it appears the drop comes between age 55 to 59.
That’s the age the big spenders reach as we step into 2016, when the real demographic cliff hits. Please keep in mind that the average age of death in America is 79 years old. Michelle Obama is 51 (born 1964) and George Walker Bush is 69 (born 1946). What caused the Baby Boom generation between 1946-1964? We call it “pent-up demand.” All jokes aside, look at average spending for those 60 and older. Other than health care, what on earth is going to make these folks spend, baby spend? Put interest rates and prices where you like. Like it or not, understand it or don’t, the sun is setting on spending because winter is coming. To this observer spending looks like a waterfall. Look at your parents for a clue on spending . I think that is a trend you can trust.
Nobody will see this changing tide, just as they are surprised that auto sales have suddenly softened, and they won’t see similar fallouts in Germany and much of Europe going into 2016 as well. But you will. This year, it may be that the stage has been set for a much worse collapse than we saw in 2008. With worsening geopolitical trends, there may be a big wave down into 2016 that could begin soon. As I said in my last article, "The Fed Can’t Fool Mother Nature." You see, it is my opinion that, being ready trumps being right.
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