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.