Economic Slowdown is Inevitable

Includes: DIA, QQQ, SPY
by: Thomas Pan

The wrongdoings from the financial system give us a perfect target to blame. However, that’s only part of the story.

The current economic booming is driven by both the housing market and durable goods. In economics, a durable good or a hard good is a good which does not quickly wear out, or more specifically, it yields services or utility over time rather than being completely used up when used once. In some degree, houses could also be treated as a durable good. These are not things that people will buy as often as clothings and food. Eventually, durable goods will reach a saturation stage that is bound by a country’s population, or more specifically, is bound by the size of a country’s workforce. At this time, even without a real estate bubble, the economy will still slow down. The current economic growth model would only sustain if we have an expanding workforce. Unfortunately, we have an opposite situation here in the US.

Outside the US, thanks to US consumers, countries like China and India are becoming more developed and richer. Given the large population that these two countries have, we will see price hikes on basic nondurable goods, such as food, water and energy. Now, on top of economic slowdown cycle, we will have a long term inflation until scientists find the right solutions to re-produce food, water and energy cheaply, which will take time.

Last but not least, the growth of S&P 500 (NYSEARCA:SPY) is slowing down. All the previous success stories, Wal-Mart (NYSE:WMT), Starbucks (NASDAQ:SBUX), even Google (NASDAQ:GOOG), are reporting smaller year over year growth, no growth, or even negative growth. Normally, it would take several years for a big company to turn around and to find the right business model. If the majority of American corporations reach the stage for change around the same time, we have to wait for several years for the change to happen. Until then, rapid growth is unlikely.

All in all, the bottom line is that the Fed can help us to a certain extent, maintaining a relatively healthy financial system. We do need to blame financial firms on their greed and wrongdoings. However, most importantly, we need to work hard to find the best business models for the next wave, and we need to aggressively exploit new business opportunities in emerging markets. We need to stop whining and start living!