The Lost Decade, U.S. Edition

by: Bo Peng

If you have read Harry S. Dent's The Great Boom Ahead as well as the sequel The Great Depression Ahead, and still are not convinced of the critical importance of demographics on the economy and markets, then there's nothing I can say to convince you. Move on. Although I think he made some mistakes in his latter book by over-stretching the idea in emerging markets and beyond, and mixed in too many cycles without foundations nearly as solid as demographics, it does not affect the validity of his main thesis.

And if you haven't read them, please do yourself a favor and read them. Just discard the "commodities cycles", "presidential cycles", "yearly cycles" and so forth, and focus on demographics. When you mix all these cycles together, it's nothing more than the Elliot Wave -- what if one cycle says up and another says down? This wiggle room greatly diminishes the significance and predictive power of the demographics argument. By the way, this is a classic mistake when one tried too hard covering all time-scales. You're better off admitting lack of insight and stick with one rock-solid idea.

The earliest babyboomers are 55 years old now, well past their peak spending years and into their retirement savings period. The later boomers, in their late forties, would be entering their peak spending years; but the scares and scars of the 2008 crisis may have forced them to enter the saving phase earlier than usual. There are many reports indicating that boomers may have been hit harder by lay-offs, and have a harder time re-entering workforce due to their age. In addition to damaged or even destroyed home equity nest eggs, the risks on social security and Medicare have risen sharply due to the dismal state and future outlook of the federal deficit, especially for the late boomers.

In terms of housing, boomers may be forced to either forego the usual trade-up or even trade down.

The result is declining productivity, consumer spending and debt (deleveraging), and continued weak demand on housing. The decline will continue until circa 2016, followed by a small rebound of 2-3 years, then resume until the early 2020's. But it's hard to say whether the small rebound would manifest into the financial markets.

To make matters worse, Europe and Japan have entered the declining phase earlier and will be stuck in the glut longer. The only hope is BIC (the R is in even worse shape in this regard than everybody else). They'd better ramp up domestic consumption soon because the aging developed world simply cannot keep buying as they used to.

Can governments save us all by money printing? Japan stands as a resounding answer of "NO" to this question. They've ramped up a huge pile of public debt, sucked up domestic savings, created a huge counter-productive bureaucracy, and nothing else. If it weren't for the extremely resilient private sector and domestic savings culture, Japan would've been in much worse shape today. I can't help wondering if it would've been much better if the government had not engaged in the futile deficit spending and the domestic savings had gone to the private sector.

If the above sounds familiar, it's because that's exactly what the US government has been trying to do. Except we won't have nearly as much domestic buying of the debt in relative terms. Uncle Sam's ability to borrow and print directly and singularly hinges on the dollar's reserve status. But the world has been actively looking for alternatives; the lunacy of some of the proposals only speaks to the desperation. How long can we count on the world's failure in this regard? Desperation is the best motivation. If the situation becomes grim enough, alternatives that sound lunatic today may appear more and more plausible.

The only hope is to create another asset bubble, or a series of them, with wide participation that last beyond 2025. A better Ponzi. BIC may be the only candidate big enough to support such a grand Ponzi. But how do we participate in that? Can they please be stupid enough to participate? Well, good luck with that.

Interestingly, Europe seems to have embarked on a very different approach to the same problem: austerity. Even the new Japanese prime minister seems to lean towards that direction. It's the only right thing to do, but it remains to be seen whether they can implement it because the short-term pain would be high. I'll write more about this later. But in any case, I don't see any political will in the US to follow suit.

Disclosure: None