By Kirk Spano
A few months ago, in my free report “Avoiding the Next Crash and Investing in the Next Boom” (which can be found on my website), I discussed how global population demographics were likely to cause global growth to be challenged for decades.
While this is not the most original thought, we know Harry Dent has talked demographics for years, and it is very underappreciated. Not only do investors fail to recognize the drag on growth that having fewer young people raising families and more elderly dependent on social programs is, but central bankers around the globe have also fallen into a terrible trap that I don't believe there is any good way out of.
The inflation targeting that central bankers are using to "stimulate" growth has been shown to be inefficient at best. More money and debt is being created than the growth it is creating. This is a terrible equation.
The core mistake that the central bankers are making is operating under the delusion that global growth will pick up appreciably ever. It is not going to. The demographics simply say that it can't.
This isn't just me and Mr. Dent saying that there is a huge problem on the horizon. Recently, Stanley Druckenmiller has become very vociferous about it. McKinsey & Company put out a report demonstrating how much lower growth would be until the middle of the century — about 40% lower. There are others pointing to the obvious even if the central banks and federal governments won't acknowledge the developing problems for fear of losing current power.
The result of the great monetary experiments has been an increase in asset prices, but also the cost of living. While I know that the official inflation rates are nearly flat, the reality is in your rents, home prices, utility bills and refrigerators. The cost of living in the past 15 years has risen substantially more than wages. This too is a bad equation.
Right now, over a dozen central banks are engaged in quantitative easing, and the most important central bank, the Federal Reserve of the United States, just finished. Even in America, we still have near zero interest rates as if there was an emergency. I think it is worth considering that maybe there is something ominous on the economic horizon.
While I believe that extremely monetary policy was appropriate to thwart a continued downward spiral, I think it is becoming obvious that, long term, it can not support growth. Keynes never intended for monetary policy to be a long-term method of creating growth. It is there for cyclical events. Once again, I will point out, we are not in a down cycle. This is permanent. We have to adjust to a slower growth world.
In the U.S. where 86% of the economy is domestic, there are natural resources, the labor force is strong, and we have a 75 million echo boomers early in adulthood. We should be able to adjust. Because most of the American economy is domestic, the Fed will eventually move to strengthen the dollar. It's what is best for the most people. If they don't make that move soon enough, the bond vigilantes will do it for them.
When interest rates finally do rise, overpriced asset markets will wake up from their easy-money-induced-lack-of-perception-about-the-reality-of-a-slower-growth-economy stupor and drop significantly. I don't know exactly when that will happen, but it is coming soon enough. My guess is there is an event in some debt-ridden place that starts a chain reaction. The dominoes might fall slowly, or we might wake up to a very dark morning. I'm preparing for both.
What's an investor to do?
In my mind, the most important thing right now is stay highly liquid with at least 25% of your money ready to buy a major stock-market correction.
You can also hedge. I have noted that I am buying some out of the money puts on the S P DR S &P 500 ETF /zigman2/quotes/209901640/composite SPY +3.36% because exporters of low-value goods are in danger of continued squeezes on their profits.
For traders, you can take a crack at iPath S&P 500 VIX Short-term Futures ETN /zigman2/quotes/202248173/composite VXX -2.33% calls. Because of the contango, this can only be a short-term trade. My quant analyst at my Fundamental Trends newsletter has just made the bull case for a trade there due to extreme oversold conditions.
The overriding theme you need to take away is that the world has a huge adjustment coming to perceptions of reality. Markets will probably overreact on the downside. Be ready for that. It will be a huge opportunity.
Disclosure: Kirk and certain clients of Bluemound Asset Management own puts on SPY and calls on VXX. Kirk has also recommended SPY puts and VXX calls at his investment letter Fundamental Trends. Neither Kirk nor Bluemound clients plan any transactions in the next three trading days. Opinions subject to change at any time without notice.