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441: Babyboomers Drive Economies and Recessions

08-22-2012 team

Aging Babyboomers: If you want to evaluate the long term economic trends for investment purposes in different countries, one of the most important things to consider is the demographics of that country. The reasons are simple. People in the 35 to 50 year age bracket spend far more money than the people in the years 20 to 35 and 50 to 75. This is the key reason why Japan went into a deflationary down-spiral from 1990 onwards and has never really recovered. They were the first to reach the time of babyboomer peak – when large swaths of their population got above 55 years old in 1990.

Post-War Boom: The disturbing things to consider is the very same is happening now in Western Europe and the USA. After World War II, a huge population boom occurred from 1945 to 1962 – the so called “Babyboomer generation”. We’ve been writing about this for six years no, but what we want to do now is more specifically tie this to economic activity and prosperity.

Downsize on Consumption: As people get old, they down-size, become empty nesters, reduce their spending and try and save as much as possible for retirement. They also earn less normally after age 55 – as their output decline and they slow at work, or they work less hours. They spend nothing more on schooling and college fees.  Consumption of almost everything drops – even food. Because the UK economy is about 60% consumption, the USA is 70% (with California 80%) – then this consumption drop has a huge impact on GDP growth. So as of 2012 when many baby-boomer begin to retire, we expect consumption to drop and GDP growth to slow – further.  But all areas and countries are not the same. The lowest GDP growth areas are likely to see property prices struggle and drop, whilst those with biggest population booms and increases is consumption will see property prices rise.

UK Example: So let’s take an example in the UK. The area with the faster growing population is London and to a less extent SE England. Expect to see consumption rise, and house prices to rise. But if you go to mid Wales, where population is stable or declining, expect to see consumption drop along with house prices. Cornwall is an interesting example, because the population is rising fairly sharply – so consumption should increase, and with very low home building, property prices are likely to move higher despite low wages, also because wealthy baby-boomers will be selling up in the north, Midlands and London – and moving their wealth to Cornwall to retire.

Strategy For High Returns: The  trick for the property investor is to find areas with expanding populations, lots of people wanting to move in – in the 35 to 50 age group – with consideration given to areas catering for wealthy babyboomers retiring. London seems to be the winner, with areas close by London and Cornwall-Devon also coming out high. But overall, the UK GDP even though the population is rising, will struggle to growth 1-2% per annum simply because so many over 55 year olds exist. And the younger population will be less wealthy than those fortunate baby-boomers that made lots of money from stocks and shares in the period 1981 – 2000 and property from 1991 – 2007. These two exception bull markets – or bubbles – gave babyboomers a big opportunity to create net worth – and the times moving forwards are likely to be far tougher to see opportunities to make serious money. Exception will be physical gold, silver (plus oil, silver and gold mining companies) – all other investments generally look shaky.

Using these trends, we can predict that:

·         Japan – recession 1990 to 2010

·         UK – recession 2012 to 2025

·         Australia – recession 2012 to 2025 (though mining could help their economy)

·         USA – recession 2012 to 2025

·         China – recession 2020 to 2035

·         India – recession 2030 to 2050

The smart money should really be in China at the moment ready to monetise and shift to India. India has the biggest upside because the population is so young and they will get to their maximum consumption years in the period  2020 to 2030 – it should be a great period for India retail unless there is a regional war and instability – particularly if the government reforms and de-regulates the economy and retail sector.

US Crisis 2013 - 2016:  The USA has a particular problem in 2016 because the US citizens have 401k’s that make it a dead cert that masses of them will start selling their stocks and share that year – then onwards. There will be massive pressure on the stock market in 2016. Up until then, it’s likely we will firstly have another collapse and deflationary period – followed by a massive inflationary period when the Fed gets the printing presses into overdrive and prints the currency into oblivion. The period Dec 2013 to end 2016 is going to be the period for the US that defines the country for decades to come as baby-boomers retire, spending drops, consumption drops, tax receipts drop, taxation increases, deflation hits followed by massive inflation. It really does look bleak. Far from thinking the $1.5 Trillion is high – by 2016, we would not be surprized if the deficit was more like $2.5-3 Trillion – almost as much as the tax revenues. The USA is already bankrupt – it’s just got an ability to keep printing money without anyone seeming to care at this time. But sometime between early 2013 and 2016 the dollar will collapse and interest rates spike, then printing will go into overdrive and gold and silver prices will go ballistic.




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