The perfect storm - I do believe it’s on the way and boy! are we in for one heck of an economic winter. Yes - you too, I’m sorry to have to tell you.
Many commentators use population data to predict a repeat of 1929, to occur real soon now. It’s something to do with the bulges and troughs in the age profile for most Western countries.
I think a ton of people are just about to retire (which they say will reduce spending in the economy as they downsize); and the age range that normally spends more (e.g. 35-45 year olds, say, getting a bigger house as the number of their children increases, and they get bigger jobs) is in a trough.
So these commentators say that you can predict the booms and busts in the stock market to come if you have the birth data for this year and just project it forward until the dates when they’ll be: (a) in college; (b) starting a family; © paying for their kids college; (d) retiring.
Each phase of their life, given the size of that particular cohort, will have a particular cumulative effect on the economy when you add in those born last year, those born the year before, and so on back, to get an overall idea of the age profile of all people alive today and how many fit into each age range.
Apparently you can also use this sort of data to predict potato chip sales too!
So what happens in a perfect storm? Well look at Japan for the past 25 years - they’re stuck in stagflation. There’s no life in the economy. Men in suits live in tents in public parks because so many were laid off when the deflation hit.
We are entering that phase now. Prices across the board drop - stock prices, rents, food, commodities, everything drops in price.
That sounds like a good thing, but its a major marker that we’ve moved into deflationary times - times of a moribund and sluggish economy. People put off making purchases as they expect the price to be lower tomorrow or next month and so the major driver of our economy at the moment, consumer spending, dries up.
And I think it took 15 years to get out of the slump following 1929 - so it will be a prolonged economic winter. A time when all the economic excesses of late can be reset, before we set off on the next cycle upwards.
Some commentators are recommending home-owners to sell their houses now and rent, because in a year or two they’ll be able to buy the same place for peanuts.
And there are 2 main ways to profit from a crash in the stock market - buy the inverse S&P 500 etf (ticker:SH) or call options on it, as it should go up as the stock market tanks; or buy Puts on the SPY etf (S&P 500), as Puts go up as the underlying SPY goes down.
The inflation figure for the UK has just been released and it was unexpectedly lower than anticipated (about 1.2% I think). You might think people should be happy with this, but no - it could indicate that the British economy is heading for deflation, and an economic winter.
Amazingly inflation figures throughout Europe are around 0.3% at the highest, and prices of goods in many Italian towns have started falling - sounds like a deflationary story has already hit there, doesn’t it?
Japan is still in its stagflation in this 25th year - throwing tons of Yen into the economy (copying QE from the USA) is a desperate, last ditch attempt to kick-start the almost dead economy - they’re timing couldn’t be worse, as all stock markets globally are showing signs of faltering (most have cut their long term 2009-2014 trend lines; and most have hit their 200 day moving averages from the upside), and most commodities are falling in price.
So while I do applaud your efforts to find a unifying theory to connect various markets together, I fear this storm will lead to a protracted winter, and in the short to medium term the prices of most everything will fall. There are tough times ahead.
Usually when the US stock market falls, it is said that the US dollar strengthens - I wonder if any of you can guess what will happen to any particular currency if prices for all things worldwide take a nose-dive?
If someone tells you that “all currencies must fall”, then presumably that is impossible, as at least one currency must rise in response to the fall in (all) most of the others.
Can you imagine a scenario when all currencies fall? An interesting conundrum - is it an impossibility?
Sorry to be so gloomy - but I didn’t want you to get so carried away with your research that you maybe overlooked the dreadful impact the coming perfect storm is going to have, as we trudge through a prolonged economic winter.
I’d be happy to throw in observations on stock market and bond inter-activity: the short point there is that when equities drop and investors get frightened, there’s a “flight to quality” which, in the past, was bonds (e.g. TLT - 20 year Treasury etf). With interest rates at such low levels, “flight to quality” is a bit overblown - its effectively “flight to cash”.
This could be dangerous if interest rates rise, as that must force bond prices lower. For example, if in the past a 10 year bond was issued with the price at 100 and pays 10% interest, then you get a $10 payment every year.
If interest rates are set at 1% (like they are now) then the price of that bond must go to $1,000. (You still get the $10 a year payment, but you have to pay $1000 for the bond so that $10 = 1% interest).
If interest rates double to 2%, then the price you will now get for that same bond will have to go to $500 - so interest rate doubled and your bond price halved.
Further, people with mortgages who can only just make the payments when the interest rate is 1%, will have real difficulty when its doubled to 2%, so presumably there’ll be more defaults.
Note how the interest rate that is set, has a direct arithmetic effect on the price of the Treasury bond. And that’s why people who own Treasuries are fearful of even a gradual interest rate rise.
And some say the only way to avoid the dreaded deflation is to slowly raise interest rates.
So with the stock market tanking, is it sensible to have a “flight to quality” (to bonds) if the price of those bonds must go down if interest rates go up? Another interesting conundrum - and something very new to the economic landscape that you are trying to map.
Good luck with the project - I’ll help where I can.
Kind regards,
Lagoonboy