Et Tu Brute, China?

Rodney Johnson | Wednesday, February 20, 2013 >>

If there is anything we have to crow about it would be our least-recognized forecast…

In 1988 – 1989, when we forecast that Japan would see a major 12 – 14-year downturn in the 1990s while the U.S. and Europe would see their greatest booms in history.

We made this prediction when most economists saw Japan overtaking the U.S. economy by 2010. At the time the Japanese were buying up much of our prized real estate and golf courses, which added insult to injury!

It looked like the Land of the Rising Sun was an ominous and very real threat to U.S. dominance.

And when we spoke out to tell everyone they were wrong – that Japan was an economic catastrophe waiting to happen – people laughed at us. They ridiculed us. Most simply dismissed me as a nut.

Well look who’s laughing now…

Today, Japan’s economy is only 38% of the U.S. in GDP. Its stock market is still down 70% from its peak in late 1989, after dropping as low as 80% in 2003 and 84% in 2009. Its real estate market is still down 60% since its peak in 1991… with no signs of a rebound.

Japan is a coma economy and you’d have to be smoking crack not to see it.

The question is…

How Could Economists Have Been So Wrong?

First, it’s obvious they’ve never had sex or run a business! If they did, what was happening in Japan would have been obvious to them.

Second, they didn’t see Japan’s bust coming because they didn’t look at what was actually driving the economy. It’s a mistake they continue to make to this day. They simply do not understand that it is people, moving through their life cycles of spending, and innovations in technology that drive ANY economy.

Back when we made our unpopular call on Japan, we had calculated that the country was at the peak of its demographic cycle (between 1989 and 1996), while the U.S. and Europe were just starting to see their best years ahead. We had also calculated that Japan’s unprecedented real restate was due to peak by 1991… the first of many real estate bubbles around the world.

That’s what we do. We look at what people will predictably do as they age in growing numbers… when they innovate… when they enter the workforce… when they earn, spend and borrow… when they save and invest for retirement.

It’s so predictable, in fact, it is a science!

(And while we all know we’re better, stronger, faster and smarter than our neighbors, friends, family and colleagues, the reality is we’re all very predictable in our spending life cycle.)

Now, this new science of economics is showing us that China’s NOT going to be the economic force everyone’s predicting it will be.

The reality is China’s a demographic time bomb just a few years away from going off…

Yes, China’s workforce declined for the first time ever, recently. But that’s just an intermediate trend. The reality is that its working-age population (those between the ages of 20 and 64) is set to peak by 2015… plateau into 2025… and then decline for decades to come. Just as Japan’s did from the 1980s forward.

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“Et Tu Brute, China?”

Yes, the rest of the emerging world has younger populations that have the capacity to grow their workforces and spending for decades to come. India is a prime example of this.

Oh, but not China!

Why?

Because its one-child policy has been in force since the early 1970s. And the full effects of this idiocy will hit China’s economy from around 2015 onward.

Our analysis does show that China is only slightly more than 50% urbanized. This means it still could have a few decades of growth if it harnesses this highly leveraged factor. We’re talking about increasing GDP per capita by three times on average.

But our demographic analysis also shows that younger people, those between the ages of 20 and 34 are the ones that migrate to new growth areas and cities, and that demographic in China is… you guessed it… dropping like a rock!

We expect China’s rural-to-urban migration rates to slow in the decades ahead, just when they’ve overbuilt every infrastructure possible in an attempt to stimulate growth.

And China is likely to see a greater slowdown than expected if the U.S. and Europe slowdown, as we expect they will between late 2013 and early 2015 (and again, between late 2017 and early 2020).

Mark my words: China’s heading for a hard landing. Don’t get caught underneath it.


Harry

P.S. That said, don’t count China out altogether. Despite its flaws, its population and work ethic are strong. It is already the second largest economy in the world, but only 40% compared to the U.S. measured in our dollars. It has one aircraft carrier compared to 11 in the U.S. As with any other bust, there are opportunities. We’ll seek them out for you. Stay tuned.

 

 

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About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.