During the remaining years of this decade preceding the 2020's will be marked by ultra low inflation or mild bouts of deflation. For those of you who have a stable job, who are debt free (including the house) and have savings in the form of stocks, bonds, real estate, gold, deflation will be your friend. It is wonderful to be able to purchase goods or services at stable prices or better still at a reduced cost. God help those who are deeply in debt for that cost does not decline in deflation but stays solid as a rock until it is paid off or in worst case bankruptcy. Add on job insecurity or outright unemployment things go from bad to worse in a nano second.
This change began to happen slowly when the market made its secular top in the year 2000 and then moved into high gear during the massive bear market of 2008 -09. Oil, stocks, high quality and junk bonds hit the skits. Along with the middle class' biggest asset residential real estate took a deflationary smash not seen since the Great Depression. But something far bigger happened internationally. As they say "Something happened along the way to the forum!"
The 40% can no longer rely on the 14% to purchase their exports!
Russel Napier described this change:
Strange as it may seem, 2008 will not go down in history as the year of the financial crisis but rather as a time when something much more important happened. It was in 2008 that 40% of the world's population realized that it could not continue to get richer by selling to 14% of the world's population(Europe and the USA). Since the end of communism, the governments of 40% of the world's population (China, India and the former Eastern bloc countries) have been depressing their exchange rates to boost their exports to the US and Europe. The resultant flood of capital into these jurisdictions, but particularly into the US, depressed interest rates and fueled the credit binge that financed the purchase of goods and led to higher asset prices. In 2008, it became clear that we had reached, or were close to, the limit of debt 14% of the world could sustain to maintain current levels of consumption.
Governments beyond the US and Europe must now look for other ways to grow. While it will take some time to engineer the solution, a move away from export-orientated growth to domestic-consumption-driven growth has been instigated. As this form of growth becomes more dominant, the need to depress exchange rates by buying dollars and US Treasuries will come to an end. This withdrawal of foreign support will be the catalyst for a significant hike in the US Treasuries yield which, after little initial impact, will bring down the price of equities. The unwinding of the truly massive distortion of US Treasury prices will impact global financial markets for several decades.
The really bad news is that the US Treasury market not only faces a structural demand problem but also a structural supply problem in the form of financing the retirement of the baby-boomer generation. Reasonable estimates suggest that the government will have to find around US $50 trillion over the next two decades to cover Social Security and Medicare payments. The US cannot afford such entitlements. Part of the solution is to cut back these handouts, either through raising the retirement age or turning down wealthier applicants. However, the political process is not designed to withdraw benefits from electors and Treasury issuance is likely to be one the, seemingly, easier ways to deal with the problem. The first baby boomer to become eligible for a Social Security retirement pension received her first cheque on 12 Feburary 2008. This is no longer a theoretical problem and the implications for the Treasury market are dire."The first baby boomer to become eligible for a Social Security retirement pension received her first cheque on 12 Feburary 2008."
SOCIAL SECURITY
Nation’s First Baby Boomer Receives
Her First Social Security Retirement Benefit
Kathleen Casey-Kirschling, the nation's first Baby Boomer, today made history as the first of her generation to receive a Social Security retirement benefit. Having applied online for benefits atwww.socialsecurity.gov, Ms. Casey-Kirschling, who was born at one second after midnight on January 1, 1946, today received her first payment by direct deposit.
The Baby Boom Generation 1946 to 1964
Currently today (December 2014) the Bureau of Labor Statistics unemployment for the 55 and older crowd is a scant 3.7%! Many of course are holding onto their jobs for dear life as they have very little in the way of retirement savings and many have no savings along with a negative net worth due the housing downturn. So its off to work in order to have a semblance of a middle class life style as those who took early Social Security need to work to make up the difference or those postponing retirement in order to receive the larger pension at age 66 or even age 70! However, as with all trends this will change. Beginning around the year 2018 (2018 -1946) -1 = AGE 71 Boomers will begin to retire or move into part time position but due to our aging society will continue to consume (granted at a lessor rate). As we move into the 2020's jobs will begin to open up as there will be a need to support the Boomer's with goods/services(and other generations plus exports) a LABOR SHORTAGE will prevail. Along with a pro-labor movement by the Millennial generation the U.S. will experience wage pushed inflation not seen since the 1960's.
The 2020's will be marked by high taxes, high inflation, and a LABOR SHORTAGE!
High taxes will be the result of the government's attempt to fully fund Social Security and Medicare. Costs that cannot be soaked up by increased taxes the government will borrow. The Federal Reserve will attempt to suppress interest rates to lessen the cost of these massive borrowings as China/India move their economies to internal consumption their need to purchase Treasury securities will abate. At the end of 2020's China will most likely be a net seller of Treasuries.
High inflation will ensue due to wage push and the Federal Reserve's attempt to hold down borrowing costs for the funding of Social Security and Medicare. However, over time yields will creep up as the world will know that America will not be able to fully fund our social programs (along with the rest of government) pushing yields higher. My best guess that in the mid 2020's politicians will be forced to make benefit reductions, at first will be a trickle and by the 2030's a torrid of changes. The 20's will be known as the decade of inflation possibly peaking at low double digits.
A labor shortage will also mark the 2020's plus a portion of the 2030's as well. Increased immigration will be sought as a solution but will be fought bitterly by the Millennial's who are very pro-labor not wanting the increased competition for jobs or income suppression. In the end due to our low birth rate the government will prevail by recruiting the best and brightest from around the world to immigrate to the U.S.
Fertility Rate
| Country | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States | 2.06 | 2.06 | 2.07 | 2.07 | 2.07 | 2.08 | 2.09 | 2.09 | 2.1 | 2.05 | 2.06 | 2.06 | 2.06 |
Russell Napier continues:
As I said in 2005, this bear market will not be over until equities trade at a 70% discount to the replacement value of their assets. That return to record-low valuations would see the S&P 500 around 400, a decline of close to 70% from the November 2005 level and within the 60%-80% range projected in the first edition of this book. As forecast in 2005, the long bear market in US equities is unlikely to be truly over until we have a bear market in US Treasuries. So investors have to beware. The initial rise in Treasury yields will be greeted as a sign of "normalization" in the US as it was from 2003-07. However, as yields return to 2007 levels and the structural deterioration of the market continues, a terrible realization will dawn.
Washington has extended the US credit supercycle by transforming a great deal of US commercial risk into sovereign risk. While this will initially seem acceptable, the cycle will end when the world realizes that the US government is a terrible credit risk because of the huge amount of debt it is trying to support. The US commercial system almost went bust in 2008-09 but the price of saving it will be the growing realization, sometime before 2014, that the government is de facto bust. This is the most likely catalyst to reduce equities to a 70% discount to the replacement value of their assets. It will be then that you should re-read this book, as great fortunes will be made by investing in very cheap US equities. Until then you should be wary of equities, unless you feel comfortable investing in bear market rallies, and you should be terrified of Treasuries.The early to mid 2020's gold will peak with the Dow to Gold Ratio at less than 3 to 1 and stocks at a rock bottom price of 30% of their replacement value. 10 year Treasuries yields will be significantly above their long term average(since 1871) of 4.62% very possibly double the average rate. A buying opportunity that only comes around once or twice in a lifetime. Be prepared for the roaring 20's.
DYI
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