Wednesday, April 13, 2016

The Millennial Moment and the global crisis

It’s a trite saying but a profound one all the same: “History always repeats.”  We’ve all heard this bromide countless times, yet how many of us have truly pondered its significance? 

The truism that history tends to repeat itself over time is the basis of the cyclical view of human affairs as applied to the financial market.  Cycle investors believe that by studying past episodes of a similar character they can divine the outcome of currents events.  It’s not surprising then that the cyclists among us have turned their attention toward the global financial market slowdown and tepid pace of the U.S. economy recovery. 

When cycle analysts examine current financial and economic affairs they can see obvious parallels between the Depression Era of the 1930s leading up to World War II.  They see the increasingly interconnectedness of the world’s industrialized countries and the threat posed by China’s economic slowdown.  More and more, even central bankers and technocrats are worried about the possibility of an economic slump that is truly global in nature.

Christine Lagarde, managing director of the International Monetary Fund, made clear the IMF is fully aware of the danger posed by the global slowdown.  In a recent speech she said:

The good news is that the recovery continues; we have growth; we are not in a crisis.  The not-so-good news is that the recovery remains too slow, too fragile, and risks to its durability are increasing.  Certainly, we have made much progress since the great financial crisis.  But because growth has been too low for too long, too many people are simply not feeling it.  This persistent low growth can be self-reinforcing through negative effects on potential output that can be hard to reverse.  The risk of becoming trapped in what I have called a ‘new mediocre’ has increased.”

Federal Reserve Chair Janet Yellen also acknowledged the possibility of spreading financial market turbulence because of China’s slowing economy.  In her latest speech, Yellen stated: “There is much uncertainty…about how smoothly [China’s] transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it.”

The fact that the world’s leading central bankers have at least recognized the danger posed by China’s slowdown will at least make it easier to combat the problem.  The famous investor Laszlo Birinyi of Birinyi Associates calls it the Cyrano Principle: when the problems facing financial markets are as obvious as the nose on your face, central bankers will have a remarkably easy time making the appropriate policy response. 

Yet as Dr. Ed Yardeni of Yardeni Research has observed, the proposals of Lagarde and other policy makers toward ending the crisis mainly involve increasing the role of government.  Yardeni pointed out that there was no mention in Lagarde’s speech of supply-side measures like cutting taxes and reducing government regulations.  She apparently believes that more government can solve the problem.  But as Yardeni wryly observed, “Too much government…got us into this mess in the first place.”

Central banks, led by the Fed, have elevated easy money policies to a sacred doctrine to maintain a stable financial market.  Most first world countries recognize the importance of a healthy financial system and the wealth effect of a buoyant stock market.  Even Democrat politicians, long opponents of the Wall Street establishment, have capitulated to the “stock market matters most” doctrine and have pledged their hearty endorsement of it. 

There’s no denying that in a financial economy like the United States has, juicing the stock market provides a spillover effect and does lift the economy to some degree.  Monetary stimulus and direct intervention can only go so far in resuscitating a stagnant economy, however.  When individuals no longer feel the urge to take risks and are more concerned with protecting their money as opposed to growing it, there’s not much central banks or governments can do to change their attitudes.  This is where the cycles come in.

The cycle which governs (or corresponds with) the combined productive and consumptive power of an entire era is the 60-year cycle, or K-wave.  The K-wave is the primary rhythm which tracks the inflationary and deflationary tendencies of the economy.  More than anything else, it’s a demographic cycle which follows the waxing and waning of a country’s long-term population growth.  The “waves” of inflation and deflation which accompany the rise and fall of generations are the results of human endeavor in the aggregate.  When a generation is both large and young, its upside potential as producers and consumers is very great and consequently it gives birth to a swelling K-wave.  This is what ultimately creates inflation, along with a rising level of productivity and standard of living for everyone.

By contrast, when a nation’s population begins aging and loses its vigor, the resulting fall of the K-wave creates deflationary undercurrents, if not outright deflation.  The falling K-wave is characterized by introversion and individualism.  People are more afraid of taking risks in a falling K-wave than they are in a rising wave; they’re also more likely to save money than spend and invest it.

Beginning around the turn of the Millennium it was evident that the U.S. was in the contracting phase of the K-wave.  Falling wages and interest rates and declining investment activity were symptomatic of this contraction.  The older generation was leaving its prime productive years and entering the winter season of life.  Among corporations, most of which are led by the older generation, R&D and capital investment spending has been in decline for years.  This was yet another sign that the contractionary impulse of the long-wave was making its presence felt.

Skeptics of the long-wave cycle ask how they can know when the long-wave has reversed.  The answer is found in demographics.  When a teeming new generation is on the cusp of their prime productive years, it’s only a matter of time before the K-wave turns up again and inflation returns.

There’s an old saying that “youth must be served.”  Each generation feels entitled to a good time, and they eventually will go out of their way to ensure its arrival.  The theory of human endeavor rhythms states that a rising generation, full of energy and ambition, will by its combined productive powers create technologies and innovations which are unique to them.  This outpouring of creative energy produces the corresponding need for capital.  This is where the stock market comes in and it explains why each generational long-wave is accompanied by a super bull market in equities.

Each American generation of the last 120 years has had its own Super Cycle bull market.  The G.I. Generation had the Roaring Twenties.  The Silent Generation had the super bull market of the 1950s and ‘60s.  The Baby Boomers experienced the magnificent long-wave boom of the 1980s and ‘90s.  Generation X had the powerful but abbreviated housing bubble/bull market of the 2000s. 

The Millennial generation is the next in line to be served.  Born between 1981 and 2000, the Millennials recently surpassed the Baby Boomers as America’s largest generation by numbers.  They are by far the most educated and tech-savvy generation in America’s history and they have the potential to create an economic super boom rivaling the long-wave boom created by the Baby Boomers.

Since the turn of the millennium the U.S. has increasingly had to shoulder the burden of the global economy on its own.  No longer can we take for granted synchronized long-wave cycles among the developed nations as we did in the 1980s and ‘90s.  Japan and many European countries are in the midst of a demographic tsunami, while China is about to enter its own version of aging demographic based on its disastrous one-child policy.  In the coming decades it will be the United States that will reaffirm its role as the premier power in the world.  The impetus behind this leadership, increasingly, will be Millennial in composition. 

Millennials were among the hardest hit by the Great Recession and many of them spent several years living in their parent’s basements well into their early adult years because of the slack economy.  They are unique among the living generations in that they have a far more jaded view of personal debt than their predecessors.  This will give them an edge as they gradually find meaningful work and begin accumulating savings and looking to invest their earnings. 

The doom-and-gloomers would have us believe that since the credit crash and Recession, the U.S. has entered a period of terminal decline.  They further preach that with the aging of the Baby Boomer generation, our country’s best days are behind it.  What they’ve failed to realize is that Millennials will be gradually transitioning into the economy to pick up the slack left by the exiting Boomers.  Indeed, this younger generation is poised to deliver a much needed stimulus to the economy once the long-wave generational cycle kicks into full gear.  

The Millennial generation is unique among American generations of the last century in that it has had to delay the gratification of its consumerist tendencies just as they’ve entered their prime years.  This will inevitably lead to an explosive release of pent-up energy when the time arrives for them to be served.  When the Millennial Moment finally arrives, in other words, it will be huge.  

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