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Linking Recessions To Demographics (Part 2 Of 2)

Oct. 18, 2013 7:33 PM ET
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The Theory of a 28-Year Lag

The theory states that the recessions of 1957 and 1960 originated in 1929 and 1932. The years 1929 and 1932 were in the trough of the Silent Generation. The theory also states that the recessions of 2001 and 2008-2009 originated in 1973 and 1980. The years 1973 and 1980 were in the trough of Generation X. These four recessions occurred when a small generation came after a larger generation. This shift in dynamics is why the four recessions did not appear on the grid chart (Figure 2) in the first part of the essay.

The recessions which originated in the Silent Generation have been credited to fiscal policy and the recessions which originated in Generation X have been credited to asset bubbles. There is always enough uncertainty in the economy to find the "reason" which explains a recession. A more fundamental explanation is found in the big demographic picture, specifically, the number of people which are spending heavily to form and maintain households.

Knowledge of the 28-year lag is important for today's investors because of the decline in the number of births that began in the year 1990. The theory anticipates the arrival of a recession approximately 28 years later. This marks the year 2018 for a recession. In 2018, the projection for the number of people expected to begin forming households will start to decline. The theory anticipates a steady decline in household formation until the year 2025. The year 2025 corresponds to the year 1997, which completed the decline in the low number of births.

In conclusion, investors can expect four years of rapid growth in household formation from 2014 through 2017. The four years of growth are expected to be followed by seven years of decline. The period of decline runs from 2018 to 2025. This decline, while less steep than the 4-year run up to 2018, is still significant and uninterrupted. It would be prudent for investors to have stop-loss orders in place on their holdings before the year 2018 arrives. Defensive puts might even be strategically used on the S&P 500 Index (SPY) to hedge against a recession. The expectation is that the recession, if it occurs, will happen well before household formation begins to increase again in 2025.

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