So, your country is running at 100% debt-to-GDP. Your fearless leader has just proposed another 7% more debt on top of that.
Your middle class is shrinking. Taxpayers are in revolt. Those receiving benefits and paying no taxes are in revolt. The 18-24 year-old set can’t find work.
Students are paying more as tuitions rise. To cope, they take on tens of thousands of dollars in debt.
Oh, and the value of most people’s largest asset – the family home – continues to fall.
Yet major equity markets shoot higher…
Great news, right?
Well, it is if you don’t fall into the trap. Despite rising equity markets, now is NOT the time to buy. It’s the time to sell.
Don’t Let the Market Fool You
Since 2007, the government has granted hundreds of billions of dollars in bailouts. It gave out hundreds of billions in stimulus money. In the background, the Federal Reserve printed trillions (trillions!) in new money and forced interest rates lower.
They’re desperate to stem the demographic tide. They’ll fail.
After more than two decades of growth fueled by Baby Boomers and their age-driven desire to spend (raising kids, building a lifestyle), this group of 72 million souls is now focused on paying down debt and saving for retirement.
In a recent Boom & Bust Elite webinar , Harry showed how this “pig in the python” is in the last stretch of their spending plateau and what will happen to the economy when they slip over the edge. It’s not a vision for the feint-hearted.
The current market rally is a simple case of Newton’s laws of motion: for every action there is a reaction. The U.S. government flooded the world with dollars, both borrowed and printed to replenish the wells that were drying up because of less spending and shrinking credit and debt. In reaction, the markets have inflated with no real substance to support it.
In the end, QE1, QE1.5, QE2, Operation Twist and, most likely QE3, will all go down in history books as stop-gap measures that solved nothing.
Demographic waves – huge numbers of people all doing the same thing at the same time – do not “turn off” or “turn around” just because the Fed or the U.S. government asks them to.
That’s why today’s opportunity isn’t to buy… but to sell.
All the Hot Air is About to Escape
The U.S. equity markets have marched higher on wonderful stories of “recovery,” but this ignores the reality of where things really stand.
If this were a “typical” recovery after a “typical” recession, GDP would be growing at 4%-5% without the stimulus and QE programs. Adding in those unpaid for sweeteners, the economy should be growing at 7%-8%.
Instead, all we could muster was a lousy 1.6% GDP growth in 2011!
Unemployment is reported at 8.3%, but that ignores the millions dropping out of the workforce. More than 45 million Americans now use food stamps. The US government spends half-a-trillion dollars on support programs alone.
Where’s the recovery exactly?
The conclusion is clear: the U.S. government may have addressed some of the symptoms caused by the changing demographic tide. But there is nothing it can do to stop it.
The Baby Boomers will continue their march toward lower spending and higher savings. They’ll put the brakes on economic activity, wreaking havoc on things like GDP growth, unemployment and home prices for years to come.
The current upswing in what should be a multi-year sideways-to-down market is giving investors a gift: the chance to sell equities that have run up to very high prices. Take advantage and grab your gains now.
Best of success,
Editor, Boom & Bust
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