The Market has maintained its downward trend to this point in 2022 and the outlook heading into the back half of the year doesn’t look any more promising from where I stand. Until sellers become buyers again I think we’ll see large segments of the market continue the current downtrend. However, I can’t dismiss the possibility that the worst is behind us either, on the notion that we’ve somehow priced in subpar or no growth, higher interest rates, and virtually no individual discretionary budgets. I suppose we’ll see soon enough.
As a primer to the post that follows, consider this post from Weforum.org: Retiring baby boomers are going to have a huge impact on the economy
Baby Boomers
I believe we’re at a critical point in time where the wealthiest generation (baby boomers) are all entering or have entered their retirements. In my opinion this means they’ll be withdrawing their money incrementally over the next several years to support themselves during retirement. Historically, this isn’t a crisis level issue as families leave any excess wealth to a beneficiary, who in turn invests that money to support their own families and the cycle continues.
However, what I’m feeling and what I’m seeing do NOT support that trend. What I believe is happening or will happen is that many baby boomers have adopted or will adopt a different mentality with regards to their wealth (and debt for that matter). Simply, its theirs, they want more of it, and its not staying behind when God calls them home. Hopefully I’m wrong, but if I’m not and if the generations after them can’t somehow pick up the slack we are in for a very bumpy ride.
Inflation
From a nearer term perspective, lets consider inflation. Typically, as I understand it the Federal Reserve targets a 2% inflation rate each year. I guess that’s the percentage point at which they believe everything keeps ticking forward appropriately. However, what happens when we have an inflation rate of say 8% a year. From a common sense perspective it can be reasoned that we just jumped ahead by 4 years. Worse, what if inflation remained high for multiple years? This could mean the Federal Reserve will do everything it can to keep inflation low or possibly even drive inflation lower. How do I spell de-fla-tion again?
From an investment perspective, I think inflation is viewed as an acceptable thing. It means that for every dollar we save today we’ll receive a 2% increase each year that will compound over time. Not too bad, right? Unfortunately, what happens when the Federal Reserve is no longer targeting a 2% inflation rate but possibly deflationary rate? Well from my perspective, nothing good. Essentially for every dollar saved today you’d be losing whatever percentage of deflation as a result. Oh, and compounded of course should deflation carry on.
Government
From my perspective until the current congress has been overhauled to include men and women from successive generations then the outlook isn’t exactly favorable. Current members of congress don’t necessarily understand the changing demographics of America. They claim to but nothing from my point of view suggests it. No disrespect intended but I’m not a young man by anyone’s assessment and our president is twice my age. Not that he isn’t capable but I think it would be difficult for anyone 40 years removed from the problems most Americans are facing to even understand them, let alone support policies that fix them.
Should the Federal Reserve target a deflationary rate, the next 10 years will be particularly painful. Millions of Americans will watch their investment portfolios shrink exponentially. It isn’t likely but it isn’t unlikely either and the probability is only increasing.
What does this all mean
Well, lets put it all together. The market has been fueled by 10 years of favorable policy, the wealthiest generation invested for their retirement at a consistent rate, younger generations all became enticed by the prospect of easy money, and inflation soared. Add that all up and you can see from the chart below how far we’ve come since the financial crisis. It hurts that the 2008-09 looks like a blip on the chart but I remember millions struggling during that time.
Now play all of those things the other way. Baby boomers withdraw money at a consistent pace, younger generations become fearful of the market, policies become unfavorable, and deflation occurs. Those all seem to suggest that the current economic climate is less than ideal. Who knows, I’ve been wrong many times before.
What Can We Do
In two words, more income! Yes, we have to make more money, and by whatever means necessary. That income can be from dividends, options, side hustles, higher paying jobs, multiple jobs, alternative investments, etc. However we do it, I think its the best way to stay ahead of the current economic climate and positions ourselves for the eventual shift.
Additionally, through continual investing efforts share counts will rise and the average cost per share will decline. Match that with higher income and its the only recipe I can concoct from the current economic climate that makes any sense.
What do you think? Am I dead wrong about all of this? Do you have another opinion? Let us all know in the comments below
