I’m not an economist but I’ve learned in my 50+ years there is a cycle to just about everything. In my last blog I explained why we moved our retirement funds out of the market – because we didn’t have a system to consistently beat the DJIA. There’s another reason. I see 3 converging macro cycles causing 1970’s levels of inflation and a bear market that will persist for another 10 to 15 years!
Inflation is like a tornado – it appears when the conditions are right and does a lot of destruction. The chart below subsets high inflation years during the 4 bear markets from 1900 to 2012. The highlighted years represent periods of high federal deficits as a % of GDP.
It appears the conditions for a run of inflation are just right for several reasons:
- We are definitely in an era of record annual and accumulated federal deficits (see 2nd chart, below)
- The current bear market has yet to experience multiple 10%+ years of inflation that occurred in each of the last 3 cycles
- The cumulative inflation of 33.69% in the current cycle is below the 189%, 89% and 61% of the previous cycles
The stock market does not perform well during periods of inflation. After adjusting the DJIA for inflation in the last year of the bear market period, neutral or modest increases are in fact losses!
Baby boomers are 76 million strong and born between 1946 and 1964. We are 1 year into a 20 year period during which 10,000 boomers will retire every day. The boomer effect will further contribute to a longer and deeper bear market for the following reasons:
- Social Security and Medicare costs will pile on additional deficits and inflation
- Taxes will increase for everyone to offset the deficits which will reduce income, consumption and economic growth
- The demand for stocks will diminish as boomers shift to lower risk investments and liquidate portfolios to maintain their lifestyle in retirement
- The push to further reduce labor costs will continue unabated (Africa) resulting in fewer and fewer “middle class” jobs for Americans
- Commodity prices will increase dramatically as worldwide demand for natural resources exceeds supply, driving up prices and inflation
- The high growth economies in the East (China and India) will continue to gain political, economic and military strength and emerge as innovators in one or more key industries like bio-technology, alternative energy, green technology, etc…
Every economic cycle in the last 100 years had a period of significant inflation. Our country is deeply in debt with huge and unfunded future obligations. China and India are competing, intensively. Like Europe before us, we must learn to live with slow growth, an aging population and in a world increasingly unwilling to fund our standard of living. If you plan to retire in the next 10 to 20 years, diversify out of the stock market and into income producing property (IncP) so you can retire earlier with more income and avoid out-living your retirement “nest egg!”
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