So, I’m reading Tom Rees’ article about the day global stock markets tumbled, last Monday. In it, he shares how a merchant in town got the strangest feeling that something was coming. “There were no buyers of anything,” said the trader. But what got me was the rest of the statement, “and the elders warned, ‘This is going to fall apart.'”
It reminded me of the years of the Dot.com bubble, when the trading rooms were filled with 20-somethings and 30-somethings with no recollection of a true bear market. Like anything tech these days, the investment industry is a young man’s field where those old enough to have a historical perspective are criticized and ridiculed for being out of touch. This is a terrible time for those without a historical perspective to be in charge of our money. You need those old folks warning “this is going to fall apart.” Otherwise, all you’ll have are young cowboys whose only frame of reference is that you always make money buying the dip. Great new flash – that’s not going to work this time, at least not in the long run.
We are on the brink of a mega bear market the likes of which we have not seen since the last time it happened between 1967 and 1982. Interestingly, the causes will be the same: a shortage of top spenders, those 46 to 50 year olds. ancient. Demographic forces have far-reaching economic implications and a continuing drop in births from 1921 to 1937 meant there would be a shortage of top spenders 46 years later. At its lowest point, there were 748,000 fewer births than in 1921. The result was a general economic malaise from 1967 to 1982, a span that included the stagflation years of the 1970s. From then on, the Baby Boomers came to the rescue, fueling our economy well into the new millennium.
The problem is that Baby Boomers are getting older and are graduating en masse from the 46-50 age group with no new generation coming to the rescue any time soon. In fact, we’ll have to wait until 2023 for Millennials to start to shore up the 46-50 bracket. And this time the economic effect will be much more pronounced than in 1967-1982. The absolute numbers guarantee it. From the peak of births in 1957 to the lowest point in 1975 there were 1,156 fewer births. That means the economic fallout should be at least 50% worse. Adding 46 years to the nadir means a nadir in the 46-year-old population in 2021 and a low in the 46-50 range two years later. In fact, it will take until 2027 for peak spending figures to reach the 2017 level.
Whether the economic downturn continues until then remains to be seen. After all, investors are looking to the future, and if they see increased spending, even at the reduced levels of 2023, they will have greater earnings visibility and bid shares higher. What is clear, however, is that, starting this year, there will be a decrease in spending by the 46-50 age group. That will translate into continued lower consumer spending, ever-lower corporate earnings visibility and an eventual decline in PE multiples from today’s lofty levels. Put another way, stocks will go down, way down.
So here’s a tip for the new generation of money managers: learn your financial history. Those who refuse will undoubtedly take up the words of old Jorge de Santayana: “Those who forget the past are doomed to repeat it.” Who cannot remember the past is doomed to repeat it.
Investors would do well to remember that. The market may well recover from today’s correction. But it won’t last. Rocky III’s Clubber Lang best described the coming market when asked about his fight prediction: “Pain!” Or how about this: prolonged carnage in the stock market. He may want to do something about it.