I want to start by asking a question. Can we have a show of hands? How many of you are stressed out right now? There is a lot going on in the world today: high inflation, the war with Russia, and economic uncertainty. People are stressed out. I find it is helpful in these situations to have a roadmap of what is going on. That way you can be prepared for what is about to happen, and you become a little less stressed. Or this might make you more stressed. I don’t know. I always think it is better to have an understanding about what is going on. WATCH NOW
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Sources:
Statista:
https://www.statista.com/statistics/797321/us-population-by-generation/
https://www.statista.com/statistics/1124008/china-composition-of-gdp-by-industry/
US Federal Reserve:
https://fred.stlouisfed.org/series/WALCL
World Bank:
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?most_recent_value_desc=true
Financial Times:
https://www.ft.com/content/475a62b7-0698-4db5-a83b-73ffa59cb3ab
CNBC:
VIDEO SUMMARY:
I am going to give you a broad overview of the major themes happening in the global economy today. This is our roadmap.
The first theme is demographics.
The main point you need to understand is that our money problems are driven by demographics. In America, the Baby Boomers are retiring. The Baby Boomers are the children of the soldiers who returned from WWII. This created a massive population increase in the United States.
Why is this a problem? When someone retires, they change their investment strategy. More than any other point in your life, your retirement date will create the biggest change in your investments. People who retire start living off a fixed income. They are no longer going to work, and they want to live off the interest on any money they have saved up over their lives. This means they will sell their businesses. They will convert risky investments into safer investments. They are basically pulling money out of the economy, because they want to live on that money for the rest of their lives. At the same time, they are leaving the workforce. They are no longer being productive. So, they are taking all the money, and telling young people they have to work harder so that the Baby Boomers can enjoy their retirement vacations.
Normally this is not a problem. Retirements happen all the time in society. But right now, the demographics of America are making this change very extreme because so many people are doing it at the same time.
Here is a chart of population in the United States by generation. You can see the massive difference between what is called the Greatest Generation and the Silent Generation and the Baby Boomers. It is an enormous jump. It was normal back then for families to have four or five kids. This is what happens to the population. Now the next generation is Generation X. That is my generation. The Baby Boomers stopped having so many kids. The population of this generation actually decreased. Now you might think, “That is such a small decrease. Why would that matter?”
All our economic systems are built based on the idea that growth will continue. So, Generation X should have been three times this amount. For instance, social security assumes that when one generation retires, there will be more people working to pay into the system. Otherwise, social security falls apart. So, for us to not feel any economic pain, the increase seen in the Baby Boomers would have had to continue. The Baby Boomers would have had to have five kids, just like their parents. But that is not what happened. They did not have enough kids to even replace themselves. And this is not just a problem with the Baby Boomers. Each generation since then has only barely had enough kids to replace themselves. This is not the fault of these generations. There just has not been the economic opportunities to have many kids. Because of this, there has been no population increase like there was after WWII. Remember history. We had the Great Depression, followed by WWII, 70-85 million people died (or roughly 3% of the world population). This was followed by dramatic population growth.
Now it is true that population is not necessarily the driver of economic growth. You can become more productive simply by making more money, even with the same amount of people. But what has happened in the US has made the situation even more skewed. Here is a chart of the percentage of wealth held by each generation in the US since 1989. Baby Boomers percentage of wealth has continued to increase and now they hold 50% of the wealth in the US. Millennials are down at the bottom. They barely have anything.
So we have this group of people, who have 50% of all of the money, and they are retiring. They are pulling this money out of the stock market so they can hold less risky investments. What is even worse, they are doing this all at the same time. That is going to put incredible downward pressure on the US economy.
The second theme is the US Federal Reserve.
This economic slowdown of the US was starting to happen even before the pandemic hit. The pandemic just made things worse. The economy was already showing signs of stress. We can see this by looking at the Balance Sheet of the US Federal Reserve. Here is a chart showing assets held by the Fed from 2002 to today. Let’s start in 2008. The housing market crashed. If you remember, the Federal Reserve bought a lot of toxic assets to keep the economy afloat. Except, they never sold them off again. In fact, they kept buying things. In 2014, you see the assets continue to increase as the Fed kept buying more assets which kept propping up markets and propping up prices. This happened at the same time that Russia invaded Crimea in Ukraine in 2014.
Now we are at 2020. The pandemic hit. You can see the Fed Balance sheet skyrocket. The Fed was buying all kinds of things to keep the market from crashing. The decision was made that it was better to prop up markets and delay a crash. If we could just delay the crash, we would not have to deal with it at the same time as the pandemic. But the crash is still coming. It was starting before the pandemic even hit.
This is extreme government intervention into financial markets. We know what happens from this type of intervention because we have seen it before. This is similar to what happened in Japan in the 90s. It is not exactly the same, but there are similarities. Japan experienced a huge market crash. The central bank propped up the economy, and Japanese markets never recovered. This is often referred to by economists as the “lost 20 years.” Let me show you what this looks like. Here is a stock market index of Japan’s major stocks since 1991. Typically, if you buy a stock, you would expect to sell it in the future for some kind of profit. In America, we have an understanding that stocks generally go up over time. As you can see, if you bought a Japanese stock 20 years ago, you would have only recently broken even. When you compare this index against the US S&P500, you see a dramatic difference. However, the US just did the same thing Japan did in the 90s, so we are likely looking at slower economic growth in the future. To avoid feeling the pain now, we are paying for it with by giving up our future stock market returns over the next ten years.
There is some argument to be made for the Fed intervening and creating a soft landing for a market crash. “Soft landing” is the term the Fed uses to describe what they are doing. They are trying to prevent a sudden crash. We can debate whether this is good or not. Regardless, that is the decision they made. What they have done is doomed us to a recession for the next 10 years. The Fed Balance sheet which is still going up, has to go back down again, or the US dollar will lose value. They will have to continue playing this game and massaging the economy for the next 10 years. We have seen this play out just this week. Federal Reserve chairman Jerome Powell made a statement. In the statement he was showing a PowerPoint slide explaining his “soft landing” philosophy and then said that the Fed is preparing to raise rates. This will likely cause economic downturn, economic pain, and unemployment. But they are doing that to combat inflation and preserve the US dollar. The bottom line is that we are going to face an economic slowdown for a very long time.
There is a famous phrase that we say in Finance. “Do not fight the Fed.” If the Fed is taking actions to slow down the economy, do not fight it. You should make financial decisions that take into account a slowing economy.
Now I do not want to be too hard on the Fed. I do think that they will eventually do the right thing. I am hearing enough of the right things being said by some very smart people that I have confidence the Fed will be able to work through this. We just have to be prepared that it might take some time.
The next theme is China.
What does this have to do with the rest of the world? Why do other countries care? Because the US is the largest economy in the world by far. What happens in the US impacts everyone else, because the global economy is so connected. We do see that China is second. Here is the problem with China. We never know if China is lying about their numbers. There have been many instances where China has fudged the data. What if these numbers are made up? If this includes fictitious revenue, China might not even be second place.
Here is a chart of the breakdown of China’s GDP in 2021. A huge part of their economy is real estate and construction. Well, we know that China is currently sitting on the largest real estate bubble in the history of the world. We all know about the giant ghost cities with buildings that have been built with nobody living in them. It is entirely possible that a large part of China’s GDP pie does not really exist.
Let us go back to the Baby Boomers. They have been working and saving their entire lives for retirement. They own 50% of the wealth in the US. This wealth has been funneled, through their investments, into China from businesses investing in China over the last 20 years. The Chinese communist party has diverted this money to worthless real estate deals in order to prop up their fake GDP. China has been destroying the world’s wealth. This is value destruction, which is the problem with Communism. They are taking money and building worthless things. Economics teaches us, you can only pull off that scam for so long.
The time that scam is ending is now. We see that with the collapse of the Chinese Real Estate giant Evergrande.
Let us go through the whole roadmap.
- The Baby Boomers are retiring
- This causes downward pressure on financial markets
- This causes the real estate bubble in China to burst
- The Fed is trying to prop up markets to avoid collapse
The result of all of this is that the whole world will feel economic pain probably for the next 10 years. I know all of this can seem complicated, but it is actually pretty simple. Baby Boomers and China are creating your pain. And I think most people understand this at some level.
We are already seeing this play out around the world. The whole world is going crazy. The war between Russia and Ukraine, is because they are also feeling economic pressure. They are doing what they can to preserve their source of income, which is oil. Everyone is trying to protect their money.
Inflation was inevitable. I do not blame the Baby Boomers. They are just doing what they were promised. They were promised that if they work hard, they can save their money and live off it in retirement. But it was a lie. I feel bad for the Baby Boomers, because they are going to lose all the hard earned money to inflation, and they can no longer work to make it back. The Fed is doing inflation on purpose because it destroys the value of Baby Boomer’s retirement. We cannot afford to have them retire. All those Baby Boomer’s that have pensions, if dollars are not worth as much anymore, companies will not have to pay as much in pension payments.
Another simple way to think about it, is to imagine an individual business. When a business experiences a drop in revenue, what typically happens? People start acting like jerks. Have you ever seen this happen? The people at the top do not want to lose any of their bonuses, or take a pay cut, so they think “How can I cut my staff, so I can keep my money?” The executives at the top cut into the wages of the people below them. And those middle managers, cut into the wages below them. That is what is happening right now on a global scale. The people at the top are doing everything they can to protect their wealth and the cuts trickle down to the rest of us. It is trickle-down economics, but with pain. By the time you get to the people at the bottom of the social ladder, they are getting screwed and can no longer afford food or housing. My prediction is that this is going to get worse, and we will start to see riots around the world in third world countries that are feeling this pressure anywhere that people cannot afford to buy food.
So, what do you do? First, I think it is just helpful to have this understanding of what is going on. It helps to have peace of mind. Second, do not get sucked into a survival mindset. As humans, we are almost programmed to fight over scraps of food, when resources become limited. If I am feeling the pain of hunger, and there is a little bit of food, there is a tendency to fight to the death against anyone trying to get that food. But you have to remember that is not your only alternative. That is a false choice because you have another option. The other option is to tighten your belt and go hungry for a little while. This brings me to my third point: this is not going to last forever. Our problems are based on demographics, which will sort themselves out over the next ten years. You can survive this, if you keep your head about you, and make smart decisions. What you should be doing, is the same basic financial advice you should always be doing: Work hard, cut costs, save your money, and make smart financial decisions.
Now I know I am going to get some angry comments in the chat saying, “Ten years is a long time to go hungry.” Sometimes you get unlucky in life, and you just have to deal with it the best you can. That is all I am saying. Make the best choices you can with the situation you are given. Sometimes you are born during a depression and you just have to deal with it. Think about the poor business owners in Ukraine. Talk about unlucky. They just had their shop blown up by a Russian missile. They did not plan on that. I want this to be a positive message. You now have a financial roadmap, so you can start planning for how you are going to make your way through these tough times.
I have to address one more thing. There is a group of people in chat who will say that this video is a good reason to go buy bitcoin. I am sorry, but bitcoin is not going to solve your problem. You cannot solve an economic problem caused by worthless real estate in China, but buying something that is also worthless. My advice to you is to spend less time thinking about bitcoin and more time thinking about hard work.
I do not want to be flippant, because people who support bitcoin do have a very legitimate fear, which is the inflation we are all facing. But what I am trying to get across in this video is that the Fed is not the problem, and bitcoin is not the answer. The Fed is trying to manage the real problem, which is the demographics of the US. The only way to solve that problem is to work through it over the next ten years.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.