There is much talk about inflation rearing its ugly head any day now, which will destroy our recovering economy as well as stocks. There's even more fear that the Federal Reserve is behind the 8-ball, and will have to scramble and raise rates higher and faster because they will be playing catch-up. That's just not in the cards for a long time to come.
Those that fear inflation sooner rather than later clearly don't understand the current economic reality in the immediate term and the power of demographics for the longer term. Wages are essentially flat (and have been since the mid 90s); CPI and PPI continue to come in at or below 2% annually and the biggest indicator, the bond market, is sending the message that deflation is more likely than inflation. The reality is that bond rates may actually go lower.
A big concern for the Fed, myself included, is the velocity of money. This illustrates the amount of money that works its way through the economy. As you can see from the chart below, it has been on a downward spiral for the last two decades. If money isn't circulating through the economy, there can be no inflation.
In the longer term, the demographic headwind will undoubtedly keep inflation low. You see, through the study of demographics, we can successfully forecast the direction of the economy for years to come. We know that consumers have predictable spending patterns at different ages and stages of life, with peak spending occurring between 32 and 48 years old.
Personal consumption, or what people do as consumers, represents about 70% of the GDP. That means that the largest influence on our economic health is how people spend their money. As people age and spend more, the economy grows. Conversely, when a large portion of the population pass their peak stage in spending, we get less spenders and the economy slows. This is at the very core of what I discuss in Facing Goliath - How to Triumph in the Dangerous Market Ahead, and it must be well understood for successful investing.
The combination of a slowing economy from declining Baby Boom spending, which we are living through now, and a slowing of workforce expansion, which comes naturally as people age and retire, will create a deflationary slowdown in the U.S. until 2023.
Is This A Bubble?
Are we in a speculative stock market bubble? Absolutely. Because the Fed has created ultra low interest rates, investors have little choice but the stock market. This bubble will end as they all do… by collapsing. You can't just sit in cash awaiting Armageddon because you are simply losing money safely to inflation and taxes. Plus it could go on this way for months or years. Who would have thought it could go this far? Our job is to be hands on tactical in managing assets so you participate for as long as you can and always to make money in any market.
For every investor who is retired or close to it, it is critical to be properly invested and work with a qualified retirement advisor to ensure that you are looking at the big picture and getting the returns you need, but with the least risk possible so you don't get crushed in the next crash or correction.
With the market looking a little tired, the risk for being all in is just too high. Nimble traders can ride the earnings train for a few more weeks in strong growth names like Apple (NASDAQ:AAPL), which you can buy on any downturn as its new products are sure to amaze; Microsoft (NASDAQ:MSFT), which is the staple for every computer made; Intel (NASDAQ:INTC), which is enjoying a major multi-year breakout; Google (NASDAQ:GOOG) (NASDAQ:GOOGL), whose earnings were once again in the stratosphere; Netflix (NASDAQ:NFLX), which is revolutionizing media delivery and will have the earnings to prove it; and Facebook (NASDAQ:FB), a social media staple and is winning over the older crowd - the very people with money and who will not be upset by the company's ads. Or simply buy the market ETFs like the PowerShares QQQ Trust ETF (QQQ) and the SPDR S&P 500 Trust ETF (NYSEARCA:SPY). After earnings season, aggressive traders should be out of these names and/or hedging with the ProShares Short S&P 500 ETF (NYSEARCA:SH) or the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX).
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.