Wednesday, November 16, 2011

A Short Course on Why The Economy Was Going To Crap Anyway - Part 2

Almost a year ago, I wrote the first piece on this topic.  My point was that the economy was going to unavoidably slow down as we progressed into this century no matter what else happened.  The two biggest reasons are the aging boomer population slowing their consumer spending, and the constant bubble-blowing of the central banks.  Add to that the profligate government spending that comes as a result of politicians believing the good times can never end, or even slow down, and you have a case for an unavoidable crash. 

One of the blogs I read that tends to have a high density of insights per inch is Sense of Events, hosted by Donald Sensing.  Donald is a retired artillery officer who went to divinity school and became a Methodist minister; if that doesn't lead to broad perspectives the rest of his background will.  Donald puts up an excellent summary, The long decline is just beginning which goes over some of the same things I do in that first piece and extends them. Donald talks about the wave of retiring baby boomers which is starting to come onshore, more like a 30 year tsunami than a wave.  
Now, where is all the money to pay for our retirement centers, medical care and vacations in Costa Rica going to come from? It will come from the equity investments we made before we retired. In short, we are going to sell stocks, bonds and mutual funds like crazy starting very soon. And because each successive year adds millions more to the retired ranks, the selloff will accelerate every year into the late 2030s and almost certainly well into the '40s.

The plain fact is that tens of trillions of dollars are going to disappear from the value of the DJIA and other stock indices over the next 20-30 years. And with each year, as the selloff accelerates, the decline in equity-companies' market value will drop even more - because each successive year, boomers will sell more equities than the year before, both as a group and individually, just to stay even.

In fact, if the near-term retiring boomers cash out only $1,500 of equities per month, starting with zero retired boomers and adding about 360,000 every month, then in only six months more than $3 trillion of sold-share value will be reached.

Read this slowly: Three. Trillion. Dollars. Sold off every six months. That's in addition to the previous semiannual's sum. That's $18 trillion of equities sold in just the first 18 months. And it only goes much higher from there. Folks, we are looking at possibly hundreds of trillions of dollars of equity sales over boomers' retirement years.

There are two huge problems with this. First, the total world market's valuation is only $37 trillion. So boomers' simply cannot cash out enough equities to maintain their standard of living because there is literally not enough money in the world to do it, assuming that boomers need only about $1,500 of sold principal per month to make up a shortfall of dividends and interest. Even if you halve the figure, the numbers can't be sustained. (underlines added - SiGB)
Boomers were sold on the stock market on the advice that "over the long term, it has always gone up", and believed it will continue to.  That investment (led by the 401k account) has provided a bonanza in capital for business expansions and start-ups; it helped fuel the tech bubble of the 90s, and that money helped fund the housing bubble of the 00s.  It's a fair statement to say the major market indices will never recover to the levels of growth they had through the 20th century, even ignoring the 1990s, and that a massive economic slowdown is going to be the inescapable result. The 21st century is going to look nothing like the 20th century and that's a big reason.

If you're still in the stock market (WTF?  why??), the old advice of "buy and hold" will be worse than useless.  If you're a trader, it's still possible to make money in the market, because money can be made regardless of the direction of the overall market.  There will likely always be good stocks to buy and bad stocks to short.  But if you're under 50, don't buy into that advice to buy the general market and go long. 
If you're approaching retirement, for this and a variety of other reasons, you probably don't get to retire unless you have well over a million saved. 

True story: I've mentioned before I work for a big company.  Like the majority of the herd, we do annual performance reviews, which is a comparison of goals you submitted a year ago, goals you were scheduled to meet, with what you actually accomplished.  This year they asked us to submit a development plan.  The first question was, "What do you picture yourself doing in three to five years?".  In my mind, I wrote, "In the best case, I'm retired, living someplace with dark skies, on 10 acres I own free and clear, with plenty of recreational opportunities, playing to my heart's content.  In the worst case, I'm crouched in the rubble that used to be my house, wearing a loincloth that some animal I killed was wearing, and defending my wife and I with a rifle.  With two bullets saved for when all other options are gone".  Then I decided not to submit the form until they tell me I have to. 


  1. Even more $$ will leave due to the criminal manipulation going on now. Got silver?

  2. SG,

    Great point: the coming sell-off by boomers to pay for retirement.

    Keep in mind the other factors affecting the slow-down such as peak oil/potable water/arable land.

  3. Just a thought: In America, it is impossible to own land "free and clear". You can rent it from state and local government, but it will never be yours.

    Can we hold it until there is no longer a government to take it from us after the economy has collapsed and it becomes impossible to pay our taxes with hyper-inflated dollars? Your guess is probably better than mine.

    I'm beginning to think I might be in better position renting rural property when TSHTF. Although I might have to share it with my landlord, if he decides it works better for him than where he currently lives. If he makes it out of the city alive.

    Or maybe it would be useful to locate a list of foreclosed rural properties, where a bank or financial institution holds title, instead of an individual. Although the owner foreclosed upon might decide to return there as well. No easy answer, I suspect, although perhaps I simply haven't thought it through yet.

  4. I believe that criminal manipulation will off us faster than this. MF Global was a far more spectacular crash than Lehman Brothers, but we don't heard much about it.

    In fact, MF Global could have very well caused permanent damage to the economy. Read Ann Barnhardt's latest here:

  5. If I understood Ann's post correctly, it wasn't the crash, but the theft of the funds belonging to investors that is the problem. Their equity was supposed to be sacrosanct, their personal property, but it was allowed to be taken by Corzine and his cronies. That is what she claims signals the end, not the crash of MF Global itself, but this further demonstration by our government that the rule of law is over. If that is what you meant by "criminal manipulation" (I'm a little slow on the uptake), then I agree.

    The elite get the first opportunity to loot America. Soon to be followed by the "Occupiers" and entitled looting what is left.

  6. Reg, I think that's what Osmium meant: the looting of investor funds as criminal manipulation. I read Ann's "going Galt" post last night. Found it featured prominently on Glenn Beck's radio show and on the Blaze.

    In re: not owning any land "free and clear", which I take as a reminder that no matter what else, you always owe property taxes, I get that. I can handle that compared to a mortgage payment.

    My late brother in law managed to retire from his own plumbing supply business (and a few side businesses) at 50. He retired from New Jersey to Arkansas basically because of property taxes. His story was that he was paying thousands a year in taxes (in the 90s). Found a parcel of land in Arkansas and asked the realtor, "how much are the taxes?". The realtor said, three fifty. He said "Gee $350 is great after what I pay in Jersey". The realtor said, "no, I meant $3.50".

    Or something very close to that.

    New Gingrich had a great answer to a questioner who asked "how fast do you think you can get the economy to come back?". Newt said, "I think the economy will start coming back late on election night when the people realize Obama is going away". (note: given as a good line that addresses that criminal manipulation, not an endorsement of Newt)

  7. SG,

    Of course I knew you got it on taxes. What I think I am struggling with is the interim between when the dollar becomes worthless - or .gov takes my 401K away from me, as has reportedly happened in several other countries - and things implode badly enough that I no longer have to fear being forced off of my land for non-payment of taxes.

    I am concerned about that period of time when local (county) government is still able to use the Only Ones to collect taxes from us as a desperate attempt to continue to fund their own operations (and paychecks), even though we are pretty much all unemployed or otherwise bereft of income with which to pay those taxes. If economic collapse occurs swiftly enough, I imagine those of us who own land - perhaps even those still paying on it - might be safe. But if it happens in degrees, I think some of us might end up facing the local sheriff's deputies seeking to remove us from our land for taxes due. And I know which way that will end, even if I am able to last through the first round or two.

    I own land in two states, but do not wish to live in either anymore (CA and FL). Rather than buy here in Montana, I am contemplating leasing some rural property instead, perhaps with option to buy. If I become convinced it would be safer to own, I can quickly buy a large lot free and clear and at least move my fifth-wheel onto it as a last resort. At the moment I can't afford what I would really like in the way of secluded rural property. Too many absentee big ranch owners out here (like the CEO of Intel) driving the prices out of reach of us "po folks". Prices haven't dropped much at all in western Montana. I might need to start looking in Wyoming or South Dakota.