So, I’m reading Tom Rees’ article on the day the global stock markets rocked, last Monday. In it, he shares how a city merchant had the strange feeling that something was coming. “There were no buyers of anything,” said the merchant. But what caught my attention was the rest of the statement, “and the older guys warned, ‘this is going to fall apart.'”
It reminded me of the Dot.com bubble years, when trading rooms were packed with twentysomethings and thirties with no memory of a true bear market. Like anything tech these days, the investment industry is a field of young men where those old enough to have a historical perspective are ridiculed 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, you’ll only have young cowboys whose only frame of reference is that you always make money buying the dip. Big new flash – that’s not going to work this time, at least not in the long run.
We are on the verge of a mega bear market like the one we have not seen since the last time it happened between 1967 and 1982. Interestingly, the causes will be the same: a shortage of peak consumers, those 46 to 50 years. old. Demographic forces have far-reaching economic implications and a continued drop in births from 1921 to 1937 meant there would be a peak consumer shortage 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 period that included the stagflation years of the 1970s. From then on, the Baby Boomers came to the rescue, elevating our economy well into the new millennium.
The problem is, Baby Boomers are getting old and graduating en masse from the 46-50 age bracket with no new generation coming to the rescue anytime soon. In fact, we’ll have to wait until 2023 for Millennials to start propping up the 46-50 group. And this time the economic effect will be much more pronounced than in 1967-1982. Pure 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 consequences should be at least 50% worse. Adding 46 years to the low point 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.
It remains to be seen if the economic downturn continues until then. 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 visibility into earnings and increase stock offerings. What is clear, however, is that, starting this year, spending will decrease in the 46-50 age group. That will translate into lower and lower consumer spending, lower and lower visibility into corporate earnings, and an eventual reduction in PE multiples from today’s high levels. In other words, stocks will go down, down a lot.
Accordingly, here is a suggestion for the new generation of money managers: learn their economic history. Those who refuse, without a doubt, will revisit the words of old Jorge de Santayana: “Those who forget the past are condemned to repeat it.” Those who cannot remember the past are condemned to repeat it.
Investors would do well to remember it. The market may rebound from today’s correction. But it won’t last. Rocky III’s Clubber Lang best described the upcoming market when asked about his fight prediction: “Pain!” Or how about this: a prolonged killing of the stock market. You may want to do something about it.