Few people realize that we are on the threshold of a truly remarkable period in history. We are witnessing the convergence of several powerful trends that will soon produce a tremendous economic boom.
The first, and most powerful trend is the peaking of consumer spending by the enormous Baby Boom generation. While capital spending dried up in the aftermath of the bursting of the Internet bubble, consumer spending ? particularly on housing ? kept going strong, making this one of the mildest recessions ever. The demographic forces that sustained consumer spending through the downturn are set to accelerate through at least 2009 or 2010.
As explained by Harry S. Dent in his 1993 book The Great Boom Ahead, every generation follows a predictable pattern known as the generation wave. This approach has proven amazingly successful for anticipating big shifts in the economy and society. It relies on analysis of four components: the birth wave, the spending wave, the innovation wave, and the organizational wave.
The birth wave tells us when people were born. The remaining waves follow the birth wave at predetermined amounts of time, which means that we can reliably predict how and when the three other curves will influence the economy.
The innovation wave dictates when each generation will introduce new technologies and concepts. This occurs when the generation is entering the workforce, and also correlates very closely with inflation rates.
The spending wave indicates the amount of consumer spending activity by each generation. At specific ages, people can be counted on to buy specific products and spend at specific levels.
Finally, the organizational wave drives the transition of power from one generation to another. The baby boom generation’s managerial style stresses individuality instead of conformity, and self-managing teams instead of bureaucracies.
Statistics tell us that consumers reach their peak spending power at the age of 46. When the 80 million baby boomers reach the height of their earning and spending power in 2009, that will represent the peak of the most dramatic economic boom in history.
Secondly, another powerful force is re-emerging: the mass-market, global adoption of information technology. In the late 1990s, most investors and executives bought into the information revolution and the belief that IT would remake the value equation in society. But as with every revolution, the short-term pay-off was overestimated and the long-term pay-off was underestimated. And, as with every prior economic revolution, a flood of capital rushed in and created a speculative bubble. When that bubble burst, the value that had been accumulated was reallocated at pennies on the dollar.
Consolidation occurred as nonviable players were acquired or liquidated. Whether we’re talking about steam power, railroads, automobiles or IT, this cycle of “creative destruction” predictably repeats itself. Unfortunately, people never learn; they think it will be different this time, but it never is. Just as we started warning people in 1999 of the impending crash, beginning with the dot-coms, we’re now alerting you to the huge upside just ahead.
Since the late 1980s, the Trends editors have been comparing the current decade to the economic boom and stock advance of the 1920s. Despite the setbacks in the stock market, we haven’t changed our minds. In fact, the sharp decline in the information technology sector, beginning in March of 2000, dramatically parallels that of the automotive sector in the first few years of the Roaring Twenties.
The average share price of car companies traded on the S&P fell 70 percent in a two-year period, between late 1919 and early 1922. From 1919 to 1922, 20 percent of the car and truck manufacturers went under. This contraction in the auto industry affected related industries like tire and rubber, which fell 72 percent, and capital goods sectors like machinery, which fell 56 percent.
The shakeout in the auto industry tells us that such a contraction during the growth phase of a disruptive product or service is predictable. It is especially likely as the new industry approaches the inflection point on its S-curve, between the 40 percent and the 50 percent market penetration mark. Whether in automobiles or the Internet, the shakeout follows a similar pattern. Shortly after a disruptive technology enters its growth phase, daring individuals see the profit potential and enter the market.
This new phase of growth occurs when the investments in the failed enterprises can be redeployed by those who are ready to make better use of them at a lower cost.
Santa Fe Institute professor W. Brian Arthur explains that every technology revolution goes through three stages:
First, a time of speculative exuberance, during which companies are started and their shares are overvalued because the hype exceeds the reality.
Second, a crash, when the shares are battered and many companies go out of business.
Third, a strong buildout period, when new competitors pick up the pieces of their predecessors, often at bargain rates, and begin creating real value for the technology’s users and investors alike.
The information revolution has moved through the first two stages. Now we’re about to start enjoying the benefits of the build-out phase in such technologies as microprocessors, telecommunications, software, and the Internet.
The reason is that, throughout history, a revolution doesn’t fully arrive until we structure our activities ? which include our organizations and business methods ? around its technologies, and until these technologies adapt themselves to us by becoming comfortable and easy to use.
Today, businesses routinely install digitally based equipment, or enterprise software, or peer-to-peer communications. But for effective use, they need to restructure their activities ? their very organization.
This will happen during the next 10 to 20 years as thousands of sub-technologies that enhance computing and the Internet are put in place. In this buildout, the technologies that will matter most are the ones that make the base technology easier to use.
The third factor is globalization, which enormously increases the scale of available markets, and dramatically increases opportunities for declining production costs over time. China has become the manufacturing platform, not only for multinationals exporting to the rest of the world, but also for those companies seeking to supply the enormous Chinese domestic market for low-cost goods.
This will play a big part in keeping inflation and interest rates low throughout the decade. The combination of declining costs and enormous, new low-end markets will further turbo-charge the U.S. and global economies.
This is all amazingly reminiscent of the economy as it stood 80 years ago in 1925, following the automotive sector crash we discussed a few minutes ago. It was a time when another large generation was reaching its demographic spending peak and technology adoption was accelerating toward saturation.
International trade, while miniscule by today’s standards, was opening up to a new level. And, just as now, leading analysts were expecting the stock market to stagnate and the economy to grow relatively slowly for many years to come. But, that’s not what happened. In reality the years 1925 to 1929 saw the greatest stock market boom in history, as well as strong underlying economic growth.
Similarly, the economy’s performance in the third quarter of 2004 was better than analysts expected. This leads us to the fourth factor: the growing U.S. economy.
The headline GDP number says the economy grew by 3.9 percent. However, if we look at core domestic growth, the best indicator of the health of the domestic economy, the performance was much stronger, according to an analysis by Lawrence Kudlow and John Park. By taking GDP, less foreign trade and inventories, and subtracting the government sector, the economy actually grew by 5.7 percent.
Among the reasons for this growth is the high rate of spending by corporations that are retooling to meet rising demand. Capital expenditures on equipment and software rose by 17.2 percent, with increases in spending on industrial equipment up by 27.3 percent, and transportation equipment up by 35.7 percent.
Moreover, the economy is creating jobs. Between March and October, the number of people employed in non-farm jobs has jumped by an average of 200,000 a month, a pace which continued through the year. For the year 2004, the U.S., as expected, increased its employment by close to 2.4 million people, which would mean total employment is only slightly below the all-time peak in March 2001.
Along with higher productivity due to automation and outsourcing, companies have boosted their profit margins to record levels. In the third quarter, profits rose 18.9 percent from a year earlier. That’s 101 percent higher than in the 2001 fourth quarter, and 9.5 percent above the previous profit peak in the 1997 third quarter. With the stock rally that began in early November, the capital markets have finally begun to reflect the underlying reality.
Based on the current reality and the ongoing convergence of the powerful trends cited earlier, we offer the following five forecasts for your consideration:
First, the stage is now set for a major upside break-out. Barring a geo-political calamity that sends oil prices soaring and depresses consumer and business confidence, we expect to see the Dow push through resistance at 10,750 by February. And we can expect it to make new highs by the end of 2005.
Second, by 2009 or 2010, we expect to see the NASDAQ at 6500 or higher and the Dow above 25,000. Depending on the level of speculative irrationality, the numbers could be even higher. We’ll be fleshing out these forecasts and the underlying opportunities in subsequent issues.
Third, regulators will take a hard look at derivatives and margin caps in an effort to minimize “irrational exuberance.” Part of the challenge in this boom will be to minimize destructive speculation. Speculative bubbles are an important part of the “creative destruction” process necessary for market economies to drive innovation. However, in the most extreme cases, the economy requires a long time to recover. Using the very appropriate analogy of the 1925 to 1929 boom, we see that the market and economy did not really recover until 1942. Therefore, it’s in the best long-term interest of the economy if the Fed, the SEC, and the CFTC get out ahead of the bubble and work to manage it.
Fourth, the underlying U.S. economy will be strong throughout the rest of the decade because of the favorable demographics, rapidly rising productivity, low unemployment, and the wealth effect that will come from the stock market boom. The U.S. will continue to be the world’s preeminent center for innovation, and a magnet for the best and brightest from everywhere. As a result, we expect real GDP growth to average 3.5 percent or more for the period.
Fifth, the next five years represent perhaps the best time in this generation to sell a business. Beginning in 2010, the aging Baby Boomers will begin to spend less and produce less. This will partially be offset as longer-lived Boomers will remain in the workforce longer than their parents, and they will spend relatively more money than their parents did in their 60s and 70s. High levels of immigration will also help to fill in the spending gap. However, the inevitable correction, or crash, needed to fix the excesses of the next stock market boom will couple with the weaker demographics to make the decade from 2011 to 2020 weaker than this decade. Those who sell their businesses and stocks toward the end of the boom we’re entering, say in 2009 or 2010, are likely to be glad they did.
References List : 1. The Great Boom Ahead by Harry S. Dent, Jr. and James V. Smith, Jr. is published by Hyperion Books. ⓒ Copyright 1993 by Harry S. Dent, Jr. and James V. Smith, Jr. All rights reserved.2. To access Larry Kudlows commentary “ Strong Economy and Profits,” visit the American Skandia website at: www.americanskandia.prudential.com3. The Next Great Bubble Boom by Harry S. Dent, Jr. is published by Free Press, a Division of Simon and Schuster, Inc. ⓒ Copyright 2004 by Harry S. Dent, Jr. All rights reserved.
