I just finished reading Gary Shilling’s book, The Age of Deleveraging, and Harry Dent’s, The Demographic Cliff. Both authors are respected prognosticators who called the real estate and financial meltdown. Both of them are saying that we’ve begun a major deflation of our economic activity that is being masked by aggressive central bank intervention and that that intervention cannot successfully mask the problem much longer.
Deflation Due to an Aging Population
Harry Dent bases his prediction on the fact that my generation, the Baby Boomers, are slowing down their earning year, heading into retirement and were shocked by the financial crisis in 2008 into aggressively saving, rather than continuing to consume and that the next generation is much smaller and can’t possibly make up the slack in the economy. In effect, demand is going down and there is nothing anyone can do to pump it up. Retired people don’t borrow money, start businesses or spend like they have a job when they are on a limited budget.
Gary Shilling arrives at the same conclusion for the same reasons and backs his forecast up by pointing to Japan, an economy that is in its third decade of deflation for similar reasons to what we’re about to experience; an aging population that is slowing its spending pattern. Shilling points out that Japan has implemented far more aggressive bond buying and money printing than the US has done with little positive effect.
In spite of it all, deleveraging continues.
The Deleveraging Paradox: Less Consumption Means Less Profit
In essence the problem of deleveraging is a paradox of economics; what is good for you as an individual can be very bad for us as an economy. For instance, it is a solid long-term wealth strategy for individual families to save every penny they can save, pay off all their credit card debt, drive an old car and live three generations deep in one house. But, paradoxically if we all did that, consumption of iPhones, housing, clothing, furniture, movies, restaurants and cars would dramatically slow down. Less consumption means less profit for companies which in turn lay people off. Those workers, being unemployed, will necessarily cut back spending; less spending takes us deeper into recession and ultimately into a depression.
Bernanke certainly saw this as the real problem facing America. In spite of a great deal of criticism from the right, he used the power of the Fed to pour several trillion dollars into the financial system via banks and the US Treasury. It seems quite likely that doing so saved us from dropping off a fiscal cliff in 2009. The question is whether the Fed is powerful enough to keep the song playing while the whole country searches for chairs to sit in when it stops. Japan’s experience indicates they can’t.
Howard Marks Discusses Investment Risk
The list of bears is growing. Last week one of my favorite gurus, Howard Marks, the founder of Oaktree Capital and one of the best distressed debt buyers in the world came out with a memo where he discusses Risk. He suggests we’re getting toward the end of the game and that we should adjust our thinking and our portfolios for the conditions we are in.
Conclusion: Prepare, Protect and Grow Your Wealth
Here’s what I’m doing; I’m only buying companies I want to hold through a drop at prices that reflect a margin of safety. Nothing new here. However, if I get all the signals screaming to get out all at the same time I may liquidate several positions even at a small loss to stack up cash like I did in 2007. It can be scary to do that too soon and be sitting on the sideline in cash but to not do it at all leaves you with everything on sale and no money to spend.
What are you doing to prepare for winter? Click the button below to download my FREE 6 PRINCIPLES FOR MARKET CRUSHING INVESTING video now.
Now go play.