Harry S. Dent | Friday, February 8, 2013 >>
We bring a unique lens to economics… it’s called demographic trends or what I like to call “economics as if people mattered.”
Our key macro indicator is a simple 46-year lag on the immigration-adjusted birth index that we call The Spending Wave.
Twenty-some years ago this indicator told us the massive Baby Boomer generation would start a boom in 1983 and it would peak around 2007. That’s precisely what happened.
Demographic trends also told us that the 1990s would see the strongest spending surge by Baby Boomers. That’s how we could forecast Dow 10,000 and the “stock bubble” way ahead of anyone else.
You see, if you look back in history, you’ll notice we get major long-term peaks in the stock market and economy about every 39 to 40 years, which coincides exactly with the generation boom and bust cycle.
That’s what happened in 1929, in 1968 and again in 2007.
But sometimes these cycles don’t follow the rules…
After the dot.com bubble burst in 1999 and deflated between 2000 and 2002, we expected a second bubble in stocks. That’s what happened in the last bubble economy between 1914 and 1929 thanks to innovations and advancements around autos, electricity and phones.
But it didn’t happen precisely that way this time around. Sure, stocks bubbled from 2002 to 2007, but not nearly as strongly as we expected. So we dug deeper to find a reason why and ended up uncovering two new macro cycles!
The first we call the Geopolitical Cycle…
About every 18 years the environment shifts from being generally favorable for stocks to unfavorable… so each full cycle lasts about 36 years. This is independent of our demographic trends and Spending Wave cycles.
For example, we had an unfavorable cycle from 1930 – 1947 (The Great Depression and World War II), a favorable one from 1948 – 1965… 36 years. We had an unfavorable cycle from 1966 – 1982 and a favorable cycle again from 1983 – 2001… 35 years this time around.
Since late 2001 (9/11), we clearly entered an unfavorable cycle that continues with turmoil around the world. Based on the Geopolitical Cycle, we expect this trend to last until around late 2019.
So expect the market to move more sideways than up… and for valuations on stocks (their P/E ratios) to be half of what they’d be during the favorable cycle.
And be warned, the riskiest time for U.S. and developed country stock markets is when the Spending Wave points down AND the Geopolitical Cycle turns unfavorable at the same time. That’s exactly what happened in 2008… and as I said earlier, it’ll last through 2019!
The Perfect Storm
I mentioned we uncovered two new macro cycles. The second one is the 30-Year Commodity Cycle.
In the last century this cycle has peaked like a clock: 1920… 1949/1951… 1980… and recently 2008/2011. But this time it struck at the same time as the other two cycles were colliding.
This means commodity prices have very likely peaked and will fall (on and off) into at least the early to mid-2020s.
This is actually more favorable for developed countries like the U.S. as it lowers our costs. But it’s the kiss of death for stock markets in most emerging countries around the world. Yes, their leading stocks tend to be commodity or resource exporters, and that is true for countries like Canada, Australia and New Zealand.
It also means we have the perfect storm on our hands. The 30-year Commodity Cycle will continue to hit emerging country stock markets and economies while the 39-year Generation Cycle will continue to impact the developed countries and the 18-year unfavorable Geopolitical Cycle will hurt all stock markets.
Talk about unlucky!
Suffice it to say, this decade will not be pretty and governments will continue to find that they have to stimulate endlessly just to keep the economy from totally collapsing.
We will see new crises every several years after each round of stimulus finally fails… again. We expect the next crash to likely occur from late 2013 into early 2015… and after that between late 2017 and early 2020. One of these is likely to be a major crisis… that depends on how quickly and effectively governments can react.
Make sure you protect your ass – ets!
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