My research over the last 30 years started with breakthrough concepts in demographics wherein I could project major booms and busts around very predictable generational spending trends, i.e., demographics. In the late 1980s I was able to simultaneously predict the long-term crash of Japan and the great U.S. and global boom of the 1990s and beyond.
That breakthrough included the impact of young new generations entering the workforce on inflation that explained why we had the highest inflation in modern history into 1980, and falling inflation ever since, despite massive growth and monetary stimulus after the Baby Boom had fully entered the workforce and then became very productive.
But when the economy surprised economists by tanking in 2008, right after my predicted peak in Baby Boom spending, there was a new game in town. Central banks simply printed unprecedented amounts of money to offset the natural decline and prevent a major breakdown in the financial system similar to the early 1930s that was clearly in motion in 2008 and early 2009.
Here’s my chart that moves forward the immigration-adjusted birth index in the U.S. for the peak in spending of the average household that was age 46 for the Boomers and 47 thus far for the Millennials. What a correlation until QE (quantitative easing).
Chart: QE Creates Frankenstein: “Markets on Crack”
The U.S. stock market is now about 120% overvalued vs. the natural trends that my breakthrough indicator in 1988 has been so good at predicting. That difference can be explained largely by one simple set of facts.
Since 2009 earnings per share of the S&P 500 have grown 119% faster than actual total profits have. What has caused that? Stock buybacks. The slowest growth recovery ever, plus ultra-low short and long-term interest rates from central banks buying their own bonds, has made it easy for companies to buyback their own stocks cheaply, and/or divert profits that are not needed to expand capacity after over-investing in the great boom and such slow growth to follow. So, they just buy back their stocks with the near-free money and tax cuts. That reduces shares dramatically and that’s what has caused earnings per share to be so out-of-step with the economy.
And just how much money did central banks print? $13 trillion and still rising thus far. The Federal Reserve printed twice as much as a percentage of GDP than they did to fight the Great Depression in the 1930s. But after a bit of tightening in recent years, its balance sheet of government and mortgage bonds is only 19% of GDP. In Europe, that ratio is 40% and in Japan it is a whopping 101%. We’re the best house in a bad neighbourhood of desperately printing money to stave off a debt bubble and nasty deleveraging like the 1930s. That’s why the dollar has held up best and will more so in the next crisis. But we were the ones that added major corporate tax reductions from Trump – and that’s why our stock markets have made new highs since early 2018 and Europe and Japan have not.
And what has been the result of all of this massive money printing: an economy almost exactly like the 1930s depression – or what I call the winter season. Cumulative real GDP from the top in 2007 through 2018, has been only 19%. In the same 11-year time period from 1929 to 1940, it was actually slightly higher at 20% - both the worst periods in U.S. history. The difference is that in the 1930s we had a major stock crash and 25% unemployment depression with massive business and bank failures upfront in the early 1930s, with an aftershock and mini-depression between 1937 and 1942.
THE GREATEST BUBBLE IN HISTORY
This time around we have had the smaller shock and mini-depression upfront in 2008/2009 as QE allowed the worst of the financial crisis and debt deleveraging to be kicked down the road – to what I forecast as between 2020 and 2023, right on a 90-year lag to the Great Depression from 1930 – 1933. In recent years I added a very clear 45-year technology cycle for surges in productivity and profits that has a larger impact every two cycles. Steamships and railroads built on each other for a revolution in global transportation. Computers and the internet built on electricity, appliances and the automobile.
This 90-year anniversary to the 1929 – 1932 crash may be the most important single cycle hitting in our lifetimes. Massive QE has extended the Baby Boom growth cycle and bubble from late 2007 into late 2019. The four key cycles I track and reveal in my latest book, Zero Hour, are at their worst between 2020 and 2023 before turning up again longer term.
The greatest bubbles and bursts since the Industrial revolution super-charged our modern economies beyond anything seen in history since the late 1700s – when free market capitalism first combined with democracy, the ultimate play of dynamic opposites. Those super-bubbles peaked in 1837, crashing into 1842 and peaking in 1929, crashing into 1932. Those two bottoms were exactly 90 years apart.
I see this stock bubble peaking likely in early 2020 or so and bottoming at levels no one expects around late 2022, with the economy following to its lows in 2023- similar to the lows in unemployment in 1933. A crash in 2020 would impact the 2020 election big-time – favouring the democrats (who need a lot of help after the two recent debates).
One of the things I have had to study intensively in the last several years has been bubbles. Bubble periods are rare and occur every other generation in what I call the fall bubble boom season. These periods see the greatest mainstream advances in technologies, a generational boom and falling inflation. That’s when bubbles occur. The entire boom of the last Bob Hope generation from 1942 – 1968 did not see bubbles and the worst corrections before the peak were 20% -- not 50% plus.
I have been on a very unrewarding campaign in recent years to remind people that we are not just in a “bubble,” but the greatest bubble in modern history that is the most global and comprehensive. It has included real estate and commodities, and the commodity bubble has already burst near the scale that I predict that bubbles do: 50%+ in real estate and 80%+ in stocks and commodities.
When economists and pundits constantly come out and say “we’re not in a bubble because…” I bring out this chart:
Chart: This Is Not a Bubble? The Greatest Crash Since 1929 – 32 Ahead
In this fall bubble boom season (now extended into the winter season of 2008 – 2023) we have seen four bubbles. A small one of 111% from 1984 – 1987 with a 40% crash to quickly follow. Then the largest since 1925 – 1929 into early 2000 with 223% gains in the Dow and 530% in the Nasdaq. It crashed 78% for tech stocks and 39% for the broad market. Then we saw a minor bubble into the peak of demographic trends in late 2007 -with 97% gains and a 54% crash. Note that the new trend since 1995 is higher highs and higher lows!
But look at the bubble since QE that I highlighted in the first chart as being 120% overvalued from the most fundamental trends. It’s a whopping 325% recently and 410% projected as I am expecting it to go as high as 33,000 on the Dow and 10,000 by early 2020 or so on the Nasdaq by current market patterns.
What is the downside of this greatest bubble of all time? At a minimum we should retest the lows of 2009 of 6,500. From a Dow of 33,000 projected, that would be an 80% crash. My best projection is a new low on a trend line through the bottoms since 2002. That would be about 5,000 by 2022. That would be an 85% crash. For the Nasdaq I project as low as 1,100 from a 10,000 top ahead. That would be an 89% crash, just like 1929 – 1932 in the Dow.
The good news is that this would end the winter season and be followed by rapid debt deleveraging and direly needed financial reforms – not more endless stimulus at ever higher levels – like a drug addict taking more to keep from coming down off their high.
And where do we go from there? A very different global boom from 1983 to now – in the next global boom from 2023 – 2036/7. Emerging countries will dominate as developed continue to predictably age and slow. Asia will dominate as it has since China’s debut in the mid-1980s. But China will be slow to recover from the most over-built economy in history at first and India and Southeast Asia will take the lead. Commodities will see another glorious boom and bubble into around 2038+ driven by the higher spending on such basics in emerging countries.
That is a subject for another article and for my next book in early 2020. EG