Mark Twain once said, “History does not repeat itself but it does rhyme.” And we are seeing that rhyming with the Millennials and the economy of the 2000s compared with the Baby Boomers and the economy of the 1970s early 1980s. In both time periods, the stock market had major downturns and amateur investors (nonprofessionals) thought the end of the time to invest in stocks had arrived and people often over invested in fixed income and lost out to some degree in the beginnings of an extended period of a structural bull market!
The 1970s and early 1980s (more than a decade) were characterized by the US going off the gold standard under President Nixon because US deficits grew so large that US did not have enough gold to match the debt, many economists predicted that the resultant sinking dollar would devastate American’s standard of living which seemed stagnate during this time period and there were calls that it was the end of the Middle Class and Baby Boomers would not enjoy as high a standard of living as their parent’s generation. In fact, the US dollar did decline. It is now worth 18 cents when compared to the value of the 1970 US dollar (using the swing in the Swiss Franc as a proxy, since it is tied to gold and is not as manipulated as the bullion due to more hedge funds and ETFs buy gold than the Swiss Franc).
This time period was also characterized by a stock market that experienced its worst performance since the Great Depression, high unemployment, large number of baby boomers entering the job market, low productivity from the large entry of young workers with lots of new skills but little experience in the job market, transition from the US being the world’s manufacturing center to its largest net consumer, a wholesale infrastructure upgrade from a generation of neglect (remember the collapse of the West Side Highway in New York City). People predicted that the Soviet Union and China would overtake the US and replace the US as the dominant super power and the environment was so degraded that breathing the air in NYC was the equivalent of smoking 2 packs a cigarettes and the Great Lakes routinely experienced instantaneous combustion.
The majority of 2000s, and 2010s have so far been characterized by record debt levels and fear amongst many that the US Dollar will no longer be the World’s Reserve currency and the resultant plunge in the value of the dollar and wholesale sale of US Treasury notes and bonds (which now fund almost half of the US annual deficit) will devastate American’s standard of living which seemed stagnate during this time period. There are current predictions and politicians running for president that we are looking at the end of the Middle Class and Millennials will not enjoy as high a standard of living as their parent’s generation.
We have also weathered through a stock market that includes its worst performance since the Great Depression. The economy has experienced extended high unemployment for about a decade. In 2015 the number of Millennials entering the job market daily now exceeds the Boomers entering the job market in the 1970s/80s. By 2025 it is predicted that Millennials will account for 40% of the workforce (18 to 34 year olds) that is the greatest percentage ever and that group is usually characterized by low productivity of young workers with lots of new skills but little experience in the job market. Funny, we are seeing low productivity, stubborn unemployment and discussion of Millennials struggling to find good paying jobs, but little discussion of the demographic effect of this group on our economy. We are also witnessing a transition of the US from being the world’s largest net consumer to a renaissance in new manufacturing and industrial production (US largest oil and gas producer out producing Saudi Arabia for the first time, Aluminum, fertilizer and 3 D manufacturing moving from other areas of the world to the US due to low natural gas costs and other technical factors), a need for wholesale infrastructure upgrade from a generation of neglect (CBS News reporter Steve Kroft on November 23rd, 2014 reports that “Falling Apart: America’s Neglected Infrastructure” and people predict that China will soon overtake the US and replace the US as the dominant economic super power and the environment was so degraded that Global Warming is blamed for Hurricane Sandy, 2015 inundation of New England with Snow, and destruction of thousands of species a year!
As with the 1970s and early 1980s, some of the predictions did come true. The US did lose its place for decades as the world’s manufacturer. That position is now held by China. The US dollar is approximately worth 1/6th of what it was in 1970. But the plunge in the value of the US dollar did not precipitate a collapse in the US economy. The Middle Class is still the largest demographic group in the US. That being said, we do have major challenges in absorbing a huge wave of young workers as the Baby Boomers retire. The generation exchange will come with hiccups and problems, it has always done so as witnessed by history. We also have a major transition in what areas of the US economy will thrive and which ones will wither and die. Let’s face it, there is little need for land lines in the US with most people having cell phones. That technology is transitioning as is the source of US electricity (from fossil fuels to alternate energy) and just like the prediction that TV would be the death knell for movie theatres (a prediction made in the 1950s and early 1960s) that death march has been much slower (there are many fewer theatres today but those that survived continue to be profitable).
So, yes, Mark Twain’s words of more than a century ago still ring true! History is not exactly repeating itself but it is rhyming. As we approach the last few months of 2015, we can predict that the stock market will continue to bring large rates of returns and with those returns will come volatility. Assuming the rhyming analogy is true, a balanced portfolio continues to be the best investment for most investors for the foreseeable future. The prediction of doom and gloom for the US economy sounds familiar and will probably be wrong.
The best advice is to continue to be conscious of your own goals and desires and see how it fits with the dynamically changing world and watch the trend as your friend and not enemy. Here at Colman Knight, we continue to do that for ourselves and encourage you to do that for yourself too.
Sources:
The Kiplinger Letter volume 92 no. 42
http://www.cbsnews.com/news/falling-apart-america-neglected-infrastructure/
