Got Demographics?

The Daily Reckoning PRESENTS: For the past five years, the United States has weathered one of the worst bear markets in history, terrorist attacks, wars and skyrocketing oil prices…why then, has consumer spending actually risen through all the chaos? Harry Dent explores…


For better or worse, we live in an economy dominated by consumer spending. This fact is a cause of concern for many traditional economists, as they believe that it is largely capital investment on the “supply side” that drives economic growth. An economy that consumes more than it produces is bound to collapse into insolvency, right? And by this rationale, the United States is due for a massive economic correction to purge these excesses?

It is highly likely that these economists will be correct about an eventual crash, though the reasons they list are effects, not underlying causes. And this inevitable crash will happen a little later than most economists think. Our forecast, at the H.S. Dent Foundation – and we have been largely correct thus far – is for our economy and markets to boom for the rest of this decade. But around 2010, the day of reckoning that economists have long feared is likely to finally come.

First, a little background. We acquired a fair amount of notoriety in the late 1980s by forecasting that the Japanese boom was quickly going to go bust and that the U.S. was on the verge of its own two-decade boom. At the time, every major financial figure, with the sole exception of Sir John Templeton, forecasted that the 1990s would be a miserable time for American investors and that Japan would soon be the preeminent world economy.

In our book, The Great Boom Ahead (1993), we forecasted falling interest rates, falling inflation, growth in productivity, and – perhaps most audacious given the economic mood of the day – we even forecasted that the Dow would hit 10,000 and that the U.S. government’s unprecedented deficit in 1992 would turn into a surplus between 1998 and 2000 due to a massive increase in revenue. We will discuss below how we reached our conclusions and what all of this means for us today, in 2006.

Traditionally, there are two ways of explaining how an economy grows. An old-school classical economist would insist that savings and investment in productive assets is what pushes the economy forward – “Supply creates its own demand,” as Say’s law says. “To the contrary,” a Keynesian might retort, “What happens when there are no buyers for what you have to sell? The key is aggregate demand that spurs production.”

Turning Japanese: Production

In fact, both of these points of view are true to an extent, but neither sees the full picture. Production creates jobs, which provides income and gives the means for consumer spending, so classical economics certainly have merit. Company profits are reinvested, and the virtuous cycle continues. But the other side of the coin, Keynesian economics properly points out, is that consumers must make decisions on how that income is used; will it be spent or saved?

Both of these views attempt to explain the “how” of economic growth, but neither explains the “why.” And both are focused disproportionately at the macro level. It is the micro level – the extreme micro level where we find the answers.

The single biggest expense to the average family is children, and the older they get the more expensive they become until they finally leave home. The U.S. Government estimates that the cost of raising a child born today from birth through high school to be $211,370. Raising the standard two children would set an American family back nearly half a million dollars, and these figures do not take university education costs into account. It is this highly predictable spending by families that drives our modern, mass-affluent economy. This spending continues even during very difficult times, as the first half of this decade has shown.

Since the year 2000, Americans have suffered through one of the worst bear markets in history, a disputed presidential election in 2000, and the worst terrorist attack in American history, two subsequent wars in Afghanistan in Iraq, and a massive oil bubble. Yet despite the chaos, consumer spending has actually risen every quarter though it all. It appears that even calamities of biblical proportions cannot stop the American consumer.

Are Americans blind to the world around them? Of course not. At worst, they can be accused of being a little stubborn. Americans will do anything in their power to maintain their standard of living, even if it means taking on more debt than they should. The typical American dad doesn’t consider the trade deficit or the price/earnings ratio of the S&P 500 when Junior grows an inch and needs a new pair of jeans. Instead, Dad just buys the jeans and figures out how to pay for it later. As a general rule, people simply do not consider the macro economy when making household decisions. They may fret about it, but at the end of the day they still buy that big, gas-guzzling SUV when Junior and his friends start carpooling to soccer practice.

Enough about Junior. What about the economy and the stock market? Well, as it would turn out, Junior leads us to quite a bit of insight. On average, people progress through a set of very predictable stages; marrying, having children, purchasing homes, and finally retiring in successive chapters of their lives. Understanding that this life cycle exists, and then seeing how it can be forecast, is the key to understanding the economy and the stock markets.

By studying consumer purchasing data compiled by the U.S. Bureau of Labor Statistics, we can forecast demand for hundreds of goods and services, including things as simple as potato chips. From this wealth of data, we know that the average American’s spending on potato chips peaks at age 42. This can be expected, given that the average American marries at about age 26, has an average child at about age 28, and 14 years later that child is eating everything in sight at the peak of their calorie cycle. Just as this type of forecasting can be done for individual products and services, it can also be done for aggregate household spending. Total household consumer spending tops out when the breadwinning hits age 48, just as the average kid is leaving home.

The good news is that the largest section of the Baby Boomer generation is quickly approaching their peak spending years, which will shift our economy into another bubble boom. The bad news is that once this mass of Boomers passes that threshold, consumer spending will slow down progressively for over a decade. When it does, our economy and stock markets will suffer.

And unlike recent recessions, where an accommodative Federal Reserve and free-spending Congress were able to muster enough demand to produce a relatively quick recovery, no amount of government stimulus will compensate for the loss of spending this time. For an idea of what to expect, look east.

Turning Japanese: A Metaphor’s Triumph

Japan’s rise from the ashes of World War II was truly meteoric. No country in history could match Japan’s growth rates from the 1950s through the 1970s. In just two decades, Japan evolved from a largely agrarian country to an industrial giant that rivaled the U.S. and Europe. By the 1980s, American companies found themselves struggling to compete with Japanese manufactures in steel, autos, and consumer electronics. Business schools began teaching classes on Japanese management techniques, and American workers looked on in fear as their bosses were replaced with Japanese managers.

The Japanese stock market played its part too. After putting up good returns throughout the 1960s and 1970s, shares shot through the roof in the 1980s, and by the middle of the decade Japanese stocks were in a full-blown bubble. Between 1985 and 1990 the Nikkei tripled, hitting a high just shy of 40,000 in December of 1989.

Today, we see a very different Japan. The present rally notwithstanding, the Nikkei is still down over 60% from the top – more than fifteen years later! Japan has spent the last fifteen years in and out of recession, never able to get any real momentum. So what caused Japan to fall into this hibernation? The falling desire of Japanese consumers. Low consumer demand due to the aging of the population meant low profits for Japanese companies, which in turn led to decreased hiring and even lower demand. A vicious cycle developed with no way out. This cycle – lower demand, lower profits, lower production, etc., is exactly what we see in our future.

The Japanese consumer got old. As he slowed his purchases in the early 1990s, the economic bubble burst despite all efforts to keep it inflated.

The Bank of Japan cut interest rates from 6% to zero, essentially giving money away in the hopes that someone would spend it to build a factory, increase production, or to consume. In the standard formula, lowering interest rates spurs consumption and investment. As the reward for saving money gets smaller, the incentive to spend it gets bigger. But an odd thing happened in Japan; interest rates dropped, but savings remained high. Consumer spending stayed flat and then fell. New investment in productive assets stalled – Japanese business already had more than enough capacity.

The United States will start “turning Japanese” around mid to late 2010. The demographic trends that have powered the economy since the early 1980s will peak at this time and finally reverse as the Baby Boomers begin to save every dollar they can spare for their impending old age. Demographically, we will be in the same place as the Japanese when they began their slow, grinding decline in 1990. And when consumer demand falls, American businesses will have a hard time turning a profit. Stocks will likely enter a long bear market, and investor portfolios will be ravaged.

Our policymakers will follow the example of the Japanese, because it is the only model they can reasonably be expected to follow. And as in Japan, the policies used will ease the pain a little but will certainly not cure the disease. Americans, long scolded by the rest of the world as being spendthrifts, will suddenly start to resemble their Asian counterparts in their saving habits. Consumer spending will fall, and the economy will scratch and claw frantically just to avoid falling into the abyss of deflation, the likes of which haven’t been seen on American shores since the 1930s.

The moral of the story? Save and invest as much money as you can in the next five years, and put your money more in growth stocks as opposed to real estate or bonds. Enjoy the grand finale of the greatest boom in history! But as we get closer to the demographic turning point, you need to get conservative. You’ll need to start “acting Japanese.”


Harry S. Dent
for The Daily Reckoning
March 14, 2006

Editor’s Note: Harry S. Dent, Jr. is a noted author who has written several books, including two best sellers. Mr. Dent has appeared on “Good Morning America”, PBS, CNBC CNN/Fn, and has been featured in numerous publications including Barron’s, Investor’s Business Daily, Entrepreneur, Fortune, Success, US News & World Report, and The Wall Street Journal. Mr. Dent received his MBA from Harvard Business School where he was a Baker Scholar.

For more information on Mr. Dent’s research, please visit the new H.S. Dent Foundation Web site:

At last, at the head of the U.S. central bank is a man with the courage of his misconceptions. You have to admire Ben Bernanke. This week, he is scheduled to face down the entire global central banking confrerie with the preposterous claim that U.S. deficits not only don’t matter – they’re actually good for the global economy.

Only an economics professor or a presidential candidate could fall for such a line; a man must be thoroughly trained in deception to deceive himself so completely. The rest of the world knows at once that it is at best a conceit and at worst, a scam.

How nice, after all, to think that there is a bank that needs to lend more than you need to borrow. It is like finding a pub that desperately needs you to run up a tab and never needs you to pay it back.

But still there are millions of Americans who would like to believe in their hearts what they know with their heads can’t possibly be true

Today’s International Herald Tribune tells us that the dollar fell because traders were worried about a bigger-than-expected current account deficit. The deficit is, roughly, a measure of how much more the nation spends than it earns. And the dollar is, roughly, a measure of how much confidence investors have in the nation that issues it. Thus, the higher the deficit, ceteris paribus, the lower the price of the national currency.

But the International Herald Tribune is making a mountain out of a molehill. To our eyes, the dollar barely budged yesterday. Stocks moved not at all, and bonds ended the day not too far from where they began. Yesterday, like the day before it and the day before it and almost all the days before them stretching back several years, the markets remained as dull and lifeless as a bureaucrat’s corpse. History – at least financial history – seems to have ticked to a stop.

The only thing that showed a pulse was gold, which leapt $6.20, to $547. As you know, dear reader, we have been waiting for a while now for the price of gold to correct. And, it has come down – to $540. But there, it is as if it has reached the limits of a bungee cord: it bounces right back.

History has been running down, at least in the financial markets, for several years now. There has not been much to say – and what there is, has been dull. The Dow is no higher today that it was near the end of the last decade. Bonds? The dollar? Someone should hold a mirror up to their noses, too, just to see if they’re still alive.

By contrast, gold seems not only alive, but to have ants in its pants. The price has gained more than 100% under George W. Bush alone. Oh, what could it be trying to tell us?

Who will listen? Not the Bush administration. The New Conservatives who have George W’s ear (and maybe his brain, too) think they have entered a new era – a post-historical age. The triumph of American democratic capitalism, and the U.S. Empire are final and irreversible, they think. All they have to do is send in the troops, and soon the people will be voting! Then, of course, it will be clear sailing and right thinking, since everybody knows that democracies evolve peacefully – always getting better and better, forever and ever, amen. The Bush government is the first one to really believe in the passing of history.

But, history never really stops – as we discovered in Iraq. And, gold never goes away. Gold is reactionary. It reacts to history like an oyster to lemon juice. The more history there is, the more it squirms. Wars, depressions, social upheavals, and breakdowns – the stronger history comes on, the more people want gold for protection from it. This demand sends the price of gold higher and higher. Of course, we don’t know that for a fact; we’ve never really studied it. We just take it as a matter of intuition. When the works of man come a cropper, the works of nature become more valuable.

Meanwhile, Ben Bernanke will have to defend his own works at the G10 conference. He will also have to defend the works of his predecessor Alan Greenspan, and those of his boss, George W. Bush, too. Bernanke will argue that the U.S. federal deficit, which contributes mightily to the nation’s lack of savings, is a necessary feature of the post-historical age. He must validate that it helps America bring sunshine and light to the rest of the world. He will argue that the U.S. trade deficit is nothing to worry about, but is a virtue, providing work for hundreds of thousands, maybe millions, of cheap foreigners. He will argue that the United States does the world a favor for which it should be grateful, absorbing and redeploying the “surplus” savings of all its penny pinchers. He will argue that the deficits represent a tiny fraction of America’s vast wealth. On this point, he might even cite the world’s foremost investor, Warren Buffett, who has pointed out that at the current rate, the United States gives up one percent of its net worth every year. But, what’s the worry, Ben Bernanke might say, at that rate we won’t go bust for another 99 years!

While this may be true in a theoretical way, his accusers could well pull out this passage from our friend John Mauldin…and rub his nose in it:

“The median family has about $3,800 in the bank, does not have a retirement account, has a home worth $160,000 with a mortgage of $95,000. No mutual funds, stocks or bonds populate their investment portfolios. They make (jointly) $43,000 and struggle to pay off their $2,200 in credit card debt. That means 50% of Americans are in worse shape than the above. It is not a pretty picture.

“As I noted last week, ‘…we find that 67% of the people aged 50-64 saved less than $10,000 last year. Over 40% saved less than $1,000!!!’ No wonder that most people expect to work after age 65.”

What Mr. Bernanke will argue is that this is a new era. While history would normally punish such spendthrifts, Bernanke will say it doesn’t work like that any more. History has stopped short, never to go again. Now, we can get away with errors, conceits, and delusions that would have sunk any other nation many years ago.

But while it could take a century to squeeze every last cent out of the United States of America, millions of American families are already down to the pulp. They could go broke this year…or next. When they stop buying, down goes the entire U.S. consumer economy, and up comes history and that history-loving metal, gold.

Over to Aussie Joel at The Rude Awakening…


Eric Fry, reporting from Manhattan:

‘Hey Guy: A word to the wise,’ writes a reader who identifies himself as Curmudgeon, ‘most Bio fuels are energy sinks…'”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.


Bill Bonner, with more news from Paris…

*** Should you buy gold now? Yes…and no. You should buy it if you want to. Now, how’s that for solid advice, dear reader? Surely, it is worth what you paid for it, is it not?

We are still waiting for a correction to the $500 level, but so far, gold has been unwilling to consider it. Does this mean the correction will never come? We don’t know.

If we’re right about the macro trends – the resurgence of history, for example – $550 gold will seem like a great bargain a few years from now. Of course, $500 gold would be an even bigger bargain.

The problem is, we are waiting in a bull market – one that could run up to $600 at any time. All it would take is a historic shock: terrorism, oil cutoff, war, plague, crash, a dollar collapse, a blow-up in the Chinese economy…or nothing at all. Many are the possibilities. History is bound to reassert herself sooner or later. When she does, options prices will erupt, stocks will crash, housing will collapse, and we will wish we had bought more gold.

*** “Repeat after me: ‘I am the CEO of my life. My financial independence is my responsibility.'”

The French press loves to highlight America’s obsession with money-grubbing. The quote above comes to us from the leftist newspaper, Liberation. It describes a new phenomenon: camps for children intended to teach the squirts how to handle money.

Liberation reports:

“A Saturday afternoon in a municipal auditorium in Santa Barbara, CA, about 40 children and parents have joined a strange sect. Under balloons, green like dollars, their guru, Elizabeth Donati, a slender blonde, waves a dollar bill in front of the kids, aged between 8 and 16: ‘You see this dollar? It doesn’t come with instructions written on the back, she explains, putting on a sad face. “It’s too bad, but you don’t get information on how to use money before you spend it. So, welcome to Money Camp.'”

What do the little bambinos learn at Money Camp? The gist of Madame Donati’s teaching seems solid to us. She encourages saving, but the purpose of saving, she says, is not to prepare yourself for a rainy day. It never rains in California; everyone knows that. No, the purpose is for you to position yourself as a capitalist. This must be what sticks in Liberation’s crawl: “I make my money work so I don’t have to,” it quotes Donati, “Investing is cool.”

We feel a rare sympathy with Liberation and for Ms. Donati, too. The woman’s counsel is far above the financial education that most American children receive, which tends to be instruction in either fraud or outright larceny. Many parents’ idea of financial training is showing the boys how to rob a liquor store without getting caught. Others are content with exaggerating their losses on insurance forms. To her credit, Ms. Donati sticks to self-delusion.

Alas, the poor youths are going to be disappointed. Investing is rarely cool. And when it is cool, that is precisely the time to stay away. When people begin to think that they can make their money work in place of themselves, or when investing makes them feel hip and fashionable, it is time to take your money out of investments and put it in anti-investments: cash or gold. When the kids learn that investing is risky – or better yet, a losing proposition – then it is safe to go back into the investment markets.