So I’m reading Tom Rees’s article about the day global stock markets wobbled, last Monday. In it, he shares how a merchant in the city had the strange feeling that something was coming. “There were no buyers of anything,” the merchant mentioned. But what got me was the rest of the statement, “and the elders warned, ‘this is going to collapse.'”
It reminded me of the Dot.com bubble years, when the trading rooms were packed with twentysomethings and thirtysomethings with no recollection of a true bear market. Like anything tech these days, the investing industry is a young men’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 men warning “this is going to collapse.” 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. old. Demographic forces have far-reaching economic implications and a continuous drop in births from 1921 to 1937 meant there would be a shortage of top spenders 46 years later. At its low point, there were 748,000 fewer births than in 1921. The result was general economic malaise from 1967 to 1982, a span that included the stagflation years of the 1970s. Thereafter, Baby Boomers came to the rescue, driving our economy well into the new millennium.
The problem is that Baby Boomers are aging and 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 shoring 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 nadir in 1975 there were 1,156 fewer births. That means the economic consequences should be at least 50% worse. Adding 46 years to the trough means a nadir in the 46-year-old population in 2021 and a trough in the 46-50 range two years later. In fact, it will take until 2027 for peak spending figures to reach 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 visibility into earnings and bid higher. What is clear, however, is that, starting this year, there will be a decrease in spending for the 46-50 age group. That will translate into continually lower consumer spending, increasingly low corporate earnings visibility, and an eventual lowering of PE multiples from today’s elevated 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.” Those who cannot remember the past are 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 upcoming 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.