Money 2000

Is it simply a given that economics and future trends have to be so complicated that you could never hope to understand them? The answer is no. The most important fundamentals that drive our economy are incredibly simple and can be forecast decades into the future with a high degree of reliability.

The key to comprehending the economy, technology trends and stock trends is to understand that it's not Alan Greenspan but Homer Simpson who drives our economy. It is the average person and his predictable spending and productivity cycles that determine the future. And who has proved that the average person is incredibly predictable, using the law of averages? Life insurance actuaries, of course. The moment we're born, they predict when we will die.

From the Consumer Expenditure Survey conducted every year by the U.S. Bureau of Labor Statistics, we know that the average person enters the workforce around the age of 19 and peaks in spending around age 46.5. New generations moving up this predictable spending cycle drive the boom and bust cycles in our economy predictably. If we move the U.S. birth index (adjusted for immigration) forward for the peak in spending of the average family, we get an incredible correlation with the economy and the stock market (adjusted for inflation). I developed this indicator in 1988, and it has been extraordinarily accurate. It predicts that this boom and bull market in stocks will last until 2008 or 2009. I predict we will see a Dow as high as 41,000 by 2008. This means that stocks will continue to reward investors into 2008.

But the truth is that I can tie almost all critical economic trends to birth cycles--or, if you prefer, sexual activity on a nine-month lag. That's why I say that sex ultimately drives our economy. (Of course, that also explains why economists have never figured it out.) But note that the baby boom generation dwarfs previous generations in size and economic power. The size factor has exaggerated all economic trends since the Forties and will continue to do so well into the future.

The massive inflation of the Seventies was driven by the high cost of raising and incorporating that generation into the workforce. Young people are an expense and investment for parents, government (education) and businesses (office space, training and new equipment) until they enter the workforce. Inflation reached its highest levels in U.S. history in 1980, 19 years after the peak of the baby boom birth cycle. Then disinflation came with the baby bust's slower workforce entry from 1981 into 1998. Now the smaller echo baby boom will cause relatively flat and low inflation rates for the coming decade--meaning low yields and returns on bonds.

The upside to young people is that they accelerate innovation, peaking around the age of 22 when they get out of college. The start-up boom in new technologies and companies peaked in 1983, 22 years after the baby-boom birth peak in 1961. During the rising tide of baby boom innovation, from 1958 to 1983, small company stocks out-performed large company stocks (concluded on page 262)Money 2000(continued from page 195) six to one on cumulative returns. But once innovation peaks and new products move mainstream with the generation's rising spending cycle, large companies tend to outperform smaller ones. Large-company stocks have beaten small by more than two to one since 1983, and they should continue to have the edge into 2008.

Debt trends peak around the age of 34, just after the average family buys its first home. That's why debt trends exploded into the Eighties and mid-Nineties. Since 1995 consumer debt trends peaked as a percentage of the U.S. gross national product and have since headed downward. The investment cycle accelerates in a person's mid-to-late 30s, peaks in the early 50s and continues to grow (unlike spending) into the late 60s. That means we will see the greatest flow of savings in history into stocks, and that's one reason stocks are rising to higher valuation levels than in the past.

But perhaps the most important trend in the coming decade will be the power cycle of the huge baby boom generation. Although new technologies emerge when the generation is young, the real revolution comes when the new people move into their power years, from the late 30s into the late 50s, when they are finally in charge of corporations and governments and can bring radical changes to work and organizations. This is when new business models emerge--like the assembly line from 1913 into the Roaring Twenties, when automobiles and many new technologies suddenly became affordable to the masses and created the last massive consumer and lifestyle revolution.

Think of the sudden emergence of the Internet mainstream and new direct producer-to-consumer business models such as Dell. Think of people moving from the suburbs to exurbs and resort towns, just as we shifted from the cities to the suburbs from the Twenties on. The real information revolution began in the mid-Nineties with the emergence of browser software. We are going to see a profound productivity revolution in the next decade and an economy that finally organizes around the individualized needs of consumers.

What does that mean for you and me? It means investors would be wise to focus on large, growth companies in sectors that boomers will embrace, such as financial services (stock brokerages and banks), health care (pharmaceuticals, biotechs and medical equipment) and technology (software, hardware and internet companies). And for international diversification, Asia (not Japan but South Korea, Singapore, Hong Kong and Taiwan) has the strongest generation cycle ahead.

We are about to witness the Roaring 2000s, the greatest boom in history. If you think we have seen dramatic changes in the past decade, fasten your seat belts and hold on.