An economic tsunami is coming – prepare for this perfect storm – your lifestyle depends on it!

America is at a crossroads. Economic fundamentals, market cycles, and demographic trends are converging and threatening the long-term economic prosperity that we Americans have grown accustomed to. The combination of Baby Boomers spending their peak spending years, a record number of Americans retiring, and a government in crisis over how to pay for it, is creating a storm of epic proportions that will affect the way you live. Few will see it coming, but those who are prepared will prosper, while those who are not will endure tremendous financial and personal hardship. Your financial well-being and ultimately your lifestyle depends on being prepared for the coming economic tsunami, this perfect storm.

Very soon, the 78 million baby boomers will be past their peak spending years and headed for retirement. It is an important moment because the United States is a nation driven by consumer spending. Personal consumption, or what people do as consumers, accounts for more than 70% of the nation’s Gross Domestic Product (GDP) and how people as consumers spend their money is the biggest influence on our economic health. Economic boom times are associated with an increasing size of the 40-something population, because this is the age when people spend the most, and bust times are associated with a decreasing size of this population. As larger groups of consumers age and spend more, the economy grows. In turn, when these groups are past their peak spending years, the economy slows…dramatically.

Graphs 1 and 2: Change in family spending at each age

As you can see from the charts above, people spend money in very predictable patterns, at very predictable times in their lives. These spending patterns directly impact our economy, business and product trends. Everything from the demand for potato chips and real estate to inflation rates, economic growth, immigration rates and internal migration is affected locally, nationally and globally. By analyzing this information, we can successfully forecast how spending will change in the coming years and decades. Economists will continue to worry about “overextended” consumers and the dire consequences to come, however, the boom in consumer spending will continue until Baby Boomers see their children finish their high school years and move on. How do we know all this? Demography!

Demographics: The Ultimate Forecasting Tool:
Demographic data points to the finer segments of consumers by age, income, and lifestyle down to zip codes and neighborhood blocks. It predicts what new generations of consumers will do as they age, and similarly can help us look ahead to key trends that will affect our coming decades. The life insurance industry was the first to use this data for actuarial predictions, to assess risk when creating life insurance policies.

Renowned economist Harry S. Dent Jr., founder of the “Dent Method,” an economic forecasting approach that applies fundamental demographic trends to key economic factors, pioneered the study of how demographics can be used to predict market trends. of values. Dent has the only documented track record of success in forecasting long-term economic trends.

As we see in Figures 1 and 2, people do predictable things as they get older. Between the ages of 18-47 we go through various stages of life. From simply entering the workforce between the ages of 18 and 22 to getting married between the ages of 22 and 30, the spending cycle is accelerated by the new departments and stores spawning these new households. The kids soon follow and then we buy our first home between the ages of 31 and 42, the stage where we incur the most debt, and buy the most potato chips because her 14 year old is eating it out. of home and home. Our expenses continue to increase as we buy our next house, more furniture and cars, etc. until about age 47 when our children reach their teens and are still living at home.

When we reach 50 children leave home. At this point, in addition to that dream car at 54 and expensive wine at 56, we start spending less, paying off debt, and saving more for retirement. After age 50, we tend to cut spending for the rest of our lives, allowing savings and investments to grow. Income does not decrease, but expenses generally do. The maximum investment rate generally occurs at age 54, which continues until retirement around age 63. Net worth typically peaks just after the age of death, currently 78. With quantifiable data on all of the key things we do as we age, the trends are largely predictable decades into the future, at the level! local, national and global!

Consider the following events that seemed to seriously derail the economy, but failed!

Do we go through these incredible obstacles and yet spend more? These disasters and threats are not what we base our spending decisions on. Families have needs that must be met regardless of current market conditions. Age and stage of life determine spending patterns. As we move through life stages that correspond to different ages, we change our spending in very predictable ways. What we buy at each stage is predictable and consistent. This information can be used to forecast how spending will change in years and decades to come. To see the actual spending stages of the population, we need to look at the Adjusted Birth Rate.

Birth Rate and Immigration: The Adjusted Birth Rate

Spending cycles can be forecast by moving the birth rate (adjusted for immigration) by the appropriate number from yours to correlate with the size of the population in the late forties.

If we plot the size of the late 40s age group against the projected year, we see the increasing trend of peaks and troughs in spending due to past variations in birth and immigration rates (Chart 3). For example, fewer babies were born during the Great Depression than before or after. So we would expect that 48 years later (during the 1970s) there would be fewer middle-aged people, thus the 1970s stalled.

Chart 3: Generational Cycles: Birth Rate Adjusted for Immigration

As you can see from the graph above, Generation X (children of baby boomers) are only 1/3 the size of the Baby Boomer generation (1946-1964). From this we bear witness to a very alarming fact; There simply aren’t physically enough Gen Xers to keep up with the spending pace set by the Baby Boomers! To see its impact, we must look at The Spending Wave.
The spending spree

The effect of people in their peak spending years is seen within the spending wave. The chart below illustrates the birth rate when moving forward 47 years to our peak spending age.

Charts 4 and 5: The Spending Wave and Generational Spending Trends

An economic boom is created not only by increased spending (demand), but also by the simultaneous increase in productivity (supply) of an efficient mature generation. This generates rising stock prices from higher earnings and rising valuations, along with low inflation. When they leave the labor force, they are replaced by a less efficient labor force leading to declining productivity with rising inflation. The next cycle occurs after consumers have left, leading to lower prices for goods and services, causing deflation.

When the massive generation of Baby Boomers finally get past their peak spending years, spending will slow, profits will decline, and stock valuations will plummet. We’ve already seen this effect in real estate, which probably won’t pick up until 2012-2015 when Echo-Boomers start buying their first homes. There simply aren’t enough people to absorb the households of the current generation. To make matters worse, retiring boomers will live off their assets and subsequently sell them in a declining market, forcing them to sell more for the same amount of money. Throw in a Social Security and Medicare system that will be stretched thin to serve this wave of retirees, and the government will be forced to raise taxes no matter who is in the White House… A perfect storm.

Why does this matter?

When managing your finances, it’s important to have a reasonable idea of ​​what your expenses will be, especially in retirement. How will economic and demographic trends and inflation affect those expenses? A financial plan that assumes rising consumer prices will look very different from one that assumes stagnant or falling prices. A portfolio of bonds and cash would be decimated by a period of prolonged inflation, but would be very profitable during a deflationary period. On the other hand, a portfolio of stocks and commodities should perform relatively well at the rate of inflation, but would be catastrophic during a period of deflation. Naturally, having a workable economic forecast that takes these factors into account is an essential part of building your financial plan.

The most important financial decision you will make in the next ten years will be your money management style and the asset allocation you choose as our economic cycles change. Choose well and you can enjoy the products and services you buy at a lower cost, while watching your savings grow. Choose poorly and your savings will dwindle and you will see your purchasing power erode. A truly personal Perfect Storm. In the resulting bear market, millions of Americans will lose their life savings, don’t be one of them.
Be the expert…or hire one!

Personal finances are serious business. When planning your life, and especially your money, you need to master the basics and spend a lifetime staying on top of it, just like we have. With the proper preparation and advice, you will be able to better understand the nature of the problems ahead that will be essential to preserving and even increasing your wealth. For a free review of your finances and to make sure you’re financially prepared for the drastic economic and demographic changes ahead, contact me today.

In conclusion

As my long-time clients attest, I am not a perpetual bear, a doomsayer, or a non-believer in the American way. On the contrary, I have been optimistic for most of my 25 years in the industry. I believe that America is the greatest nation the world has ever known, and there is nothing in our future that we cannot overcome. Naturally, I hope these predictions are wrong, but we just can’t take chances and be unprepared. The media wants you to believe that headlines move markets, and no one knows what the next “most important thing” will be for the media. What I do know is that, as powerful as wars, hurricanes, and oil spikes may be, the spending cycle will continue to dominate the economy. When the baby boom boom ends, it will be vital to your lifestyle to know when and what to do, as well as how to invest to protect yourself and your family, and profit from it. Regardless of economic conditions, we will be ready for our customers.

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