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Nov. 15, 2012, 12:47 p.m. EST

Cliff or no, demographic depression will continue

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About Kirk Spano

Kirk Spano, the winner of the first MarketWatch competition to find the world’s next great investing columnist, is a registered investment advisor and founder of Bluemound Asset Management, LLC  which seeks to provide investors with greater safety, growth, income and freedom. Kirk’s biography and various business endeavors can be found at KirkSpano.com. Follow Kirk on Twitter @KirkSpano or at the Bluemound Facebook page for his columns, company analysis, letters, trade notes and what he is reading.


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By Kirk Spano

In September of 2008 I met with a group of CEOs and presidents of local manufacturers for coffee. One of the questions that was asked was, "How long will things be tough in the economy?"

My answer was that things should get back to a more normal growth path around 2015 or slightly later. The person who asked the question was incredulous at my response. I think more than one person thought I was crazy.

Since then I have come to understand that the financial crisis and economic downturn, though linked, are really two different creatures.

The financial crisis developed due to a host of things that lined up perfectly: long-term debt accumulation at the personal and government levels, poorly thought out deregulation of finance, loose monetary policy, hot money, greed, poor financial planning, stupid investments, crummy underwriting, bad judgment up and down the system and outright fraud.

"It's a recession when your neighbor loses his job; it's a depression when you lose yours."

—Harry S. Truman

The "demographic depression," a term I started to adopt in autumn 2010 and foreshadowed in the late summer of 2009 , isn't so sexy as a "crash." But it is every bit as real and much more enduring.

I explain it to clients and whoever happens to ask my opinion pretty simply.

The baby boomers are a huge generation that drove not only U.S. growth for decades, but in fact, global growth. They are older now and have had a couple of huge financial shocks the past 12 years. There was a similar, though less-prolific group in Europe, that was also important, however, it was American baby boomer spending that drove things. That group is done spending. That excess demand is gone.

My generation, the "X" generation is a small generation. We do not have the sheer numbers to support a rebound in aggregate demand. The "Y" generation, or Millenials, are a large generation, but as of yet, have relatively little money. They might push Justin Bieber demand and iPhones, but aren't buying many new cars, homes or durable goods for awhile yet.

If we were to only rely on America to drive economic growth for the world, we would indeed be in for hard times until the middle of the next decade as Thomas Kee discusses. Fortunately, there is more than America out there, and that is the hope for growth to ignite again in the next few years.

Because there are billions of people in the world who would like to live better, the demographic depression we are experiencing now very well could break on the time frame I identified back in 2008, somewhere between 2015 and the end of the decade. Serving that emerging demand, which will be very base level demand for food, energy and medicine is what should drive growth again, sooner than domestic demographics would otherwise indicate. Much more on this tomorrow and in coming weeks.

Here at home, we are focused on avoiding a recession in 2013 and watching for the super-exciting, breathlessly covered "fiscal cliff." That is a mistake. We ought to be working on a way to deal with the longer-term demographic depression instead. Unfortunately, politicians are a wild card.

I am not going to hazard a guess as to what politicians will do in the next few months. Going over the fiscal cliff makes some sense for our long-term economic health and compromise is hard to find, so it might happen. A compromise solution which flattens entitlement and defense spending, develops an infrastructure rebuild, keeps tax rates the same on the middle class and slightly raises taxes on the investor class makes the most sense to me, but who cares what I think?

For investors, we are in a very uncertain short-term. As I discussed a couple months ago, take a balanced approach to your investing and use any significant correction to position for coming inflation as that is ultimately government's default approach.

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