Boom or Bust
Understanding and Profiting from a Changing Consumer Economy

By Douglas C. Robinson and Charles L. Sizemore, CFA 

Introduction

Every day we are hit with a barrage of information, and much of it is related to the state of the economy. An informational overload, our morning newspapers, cable TV channels, and favorite web sites bubble over with stock quotes, advice from financial experts, commentary on Federal Reserve policies, and the occasional dire warning of impending “doom and gloom.” With so much information and so many conflicting opinions, many people throw up their hands in despair and simply give up the hope of ever understanding it all. Some latch on to one expert’s opinion, the guru of the day, and attach an almost mystical significance to his or her thoughts, ignoring all contrary evidence. Others look for a political explanation for every bend and twist in the economy, attributing prosperity to the party of their choice and blaming all hardship on the other party.   

The sheer multitude of opinions guarantees that at any given time most of them will be wrong. Of course, some are never “wrong” because they never give a clear forecast to begin with. President Harry Truman famously asked for a one-handed economist because his advisers had a habit of equivocating with “on the one hand…but on the other hand….” One might compare an economist to an octopus given the number of “hands” they often list in their prognostications. 

Most mainstream economic literature is of limited value for planning your life and your investments. It does not matter much in your retirement planning if GDP grew at exactly 4.1% last quarter vs. the consensus opinion of 4.2%. This is unlikely to impact major life decisions, such as whether to buy that new house of your dreams or whether you should send your child to that expensive private school. Monthly economic news releases are generally little more than statistical noise, far from deserving the sense of urgency they inspire among the news anchors on CNBC.

At the same time, many long-term facts and figures have little use for real planning as well. It is very small consolation to you that the stock market goes up 7% per year over the “long run” if you have just lost 50% in a major bear market, like that of 2008. This becomes even more true if you are in or near retirement. Sure, over time your portfolio should recover its losses. But as the economist John Maynard Keynes famously said, “in the long run, we’re all dead.”

In order to make real decisions, we need better information. And luckily, the information exists right at our fingertips. We will never be able to predict every twist and turn in the economy or in the financial markets. There is simply too much randomness in the short-term and too much dependence on human emotion. But just as people make the economy and markets random and erratic over short periods, they also tend to make it surprisingly predictable over the medium to long-term. In an economy that is 70% consumer spending, it is ordinary people that drive the economy, and, on average, people are very predictable. By understanding consumer behavior, it is possible to forecast the direction of the economy and even the multi-year direction of the stock market. Using demographic data, you can make critical forecasts for individual industries and real estate markets. Such data can also be used by governments (or would-be taxpayers) for everything from school construction to public pension systems.

In this book, we will attempt to break economics down to its core. What really matters? And how do we use this information to make better decisions? The pages of this book are full of valuable material, but it is not designed to simply give you the “answers.” Instead, this book is designed to act as an instruction manual of sorts. Our goal is to help you ask the right questions.

We cover a lot of details in this book, and in an attempt to make it easier to digest we have divided it into sections:

• Part I of the book is a general discussion of the economic trends that will be affecting every American over the next several decades. Inspired and based largely on the pioneering work of economic strategist Harry S. Dent, Jr., this section focuses on the effects that demographic trends have on the broad economy. It is an essential read for anyone concerned about their financial future.

• Part II concerns the factors impacting state and local governments, specifically their employee and retiree healthcare funding liabilities. The funding requirements needed to finance promised healthcare benefits of the Baby Boomer generation will be the single biggest challenge for state and local governments for decades to come. Without an effective strategy to mitigate these liabilities, states, counties, and cities will find themselves insolvent…and with mobs of angry taxpayers, employees, and retirees with which to contend. This section is mandatory reading for state and local government officials and for anyone concerned with this impending crisis.

• Part III covers portfolio strategies for the years ahead. This section will advise on how to design appropriate portfolios and offers advice on which asset classes to favor in the next economic season. This will be valuable for anyone looking to protect and grow their wealth while minimizing risk.

• Finally, Part IV takes a look at the challenges and opportunities at the city, county, and state level due to changing demographic trends. In any economic season, there will be areas that prosper, at least relative to the national average, and other areas that lag behind. These chapters will be valuable to any current or aspiring homeowner, small business owner, or local public official. It should also prove valuable to young families planning their careers and to retirees considering a move. Special attention is given to California, the largest state in the union by population and economic clout.

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