In the past year the dire predictions of doomsayers and fear mongers have vacillated from annoying to deafening. While the negative group of peddlers might be right for enough of a moment to claim victory, in reality they won't be. Their calls for a financial collapse have been echoing since the last financial collapse. What is coming next is no collapse, it is a small and normal bear market which will be followed by something quite different than a collapse.

Deflation is Dead

The baby boomers have been especially susceptible to the negative chatter by cable news, uninformed radio, the online pseudo-media and pretend research analysts. Over the past year, baby boomers have been pulling money out of the stock market on fear of the next collapse. Just last week, investors - mainly boomers - pulled more money out of the U.S. stock mutual funds than any seven day period in two-and-a-half years. http://goo.gl/se0eTR

I have been among those who have said to accumulate cash since last winter. http://goo.gl/8O2tl4 My reasons have not been because I expect to see a financial collapse however. Collapses occur when credit freezes up. We are far away from that happening. The same thing that people point to as a negative - money printing via deferred debt - is the same thing that prevents an economic collapse. There is simply a lot of money out there available for investment. So, while we might see stock and bond markets struggle, those struggles will be treated as opportunities by enterprising investors. 

I expect to see a normal pullback in equity markets and then a major shift in tomorrow's winners vs yesteryear's.With the exception of mega-cap stocks, particularly technology, the correction I forecast has been going on since summer across many sectors - especially energy - down the capitalization scale - especially small and medium size companies. What I am warning people about now is not to miss investing in tomorrow. 

As fear and doom are easy to spread today via internet and too hungry for ratings media, investor psychology has plummeted. I expected this of the overemotional baby boomers who have not been good investors in general during their lives. I am very afraid of the baby boomers never getting back to an equity heavy position in their portfolios. This would be completely the wrong approach, but it could be what happens.

What I hope is that the boomers with money to invest realize that they are going to live a long time and must get back into the stock market soon or get eaten by inflation over time. As much as I expect the baby boomers to be emotional, I also think they are smart and becoming more sophisticated investors. I suspect many boomers have raised cash with the intention of investing in stocks on a correction. I hope I am right.

It will be right for baby boomers to get reinvested for three core reasons. The first is that inflation is coming and it's coming in a big way. By definition, inflation occurs when the growth rate of money supply exceeds the growth rate of people to spend it. An easy way to think of this is that inflation eventually manifests in prices whenever more money is printed than their are new people born to use it. 

Globally, central banks have printed trillions of dollars worth of currencies. While I think that was the right move to avoid a painful deep long-term spiraling depression, it has put us on a longer path that will be marked by bouts of "stagflation." Why? Because no amount of money printing can fix demographics. There is simply going to be a slower growth global economy in the future than there was in the post World War II through tech boom era. http://goo.gl/ng7vS7 

In conjunction with central bank money printing, the commodity collapse is going to add to inflationary pressures as soon as next year, but certainly within a few years. The commodity collapse is resulting in massive cutbacks of investment in future production of everything from cotton to oil to iron ore to potash. When current excess inventories are used up - and that happens much quicker than people think - we will start to see rapidly rising prices of many goods. There is only two ways to keep up with kind of inflation. Make more money at work or have investments that are rising in value.

The types of investments that will rise in value during inflation are generally the stocks of commodity producing companies, certain energy stocks and technology company stocks. Some REITs will also do well, as will direct ownership of some commodities. Sitting in cash or bonds will be among the worst places to be invested. 

The second reason that boomers ought to invest is simple - life expectancy. While old rules of investment are that you should cut back on stock ownership once you are retired, that concept is about as old as the Betamax and just as useful. The idea of drastically cutting stock market asset allocation is form an age where age didn't get to where it does today. The boomers are going to live well into their 90s.

Warren Buffett suggests keeping 100% of invested money in the stock market. I think an easier rule is the one I use: 75 to 75. What is that? On average, baby boomers should keep 75% of their invested money in the stock market. Today, with many baby boomers at 40-50% in stocks, that gives them an opportunity to invest aggressively when the next stock market correction plays out. 

The final reason to invest is that there are still two pockets of growth in the world. The first is America. Our millennial generation is large, is maturing into the labor force and started forming households with children in 2012. They are going to drive the American economy for the next 20 years. They are a force of economics every bit as much as the baby boomers whom they out number. Don't discount them, you will regret it. 

The other pocket of growth is emerging markets where they have rights, age, education and resources on their side. Countries getting pummeled now like Brazil and Indonesia are going to be places to invest in soon. It will pay to be cautious with such investing, however, slow handed investing could pay off big. 

It is important to keep in mind the big trends when investing. In my annual letter next weekend I will cover the two biggest trends for the next thirty years. Until then, think about how you are going to get back to your full equity asset allocation. Sometime in the next year or so, you'll get an opportunity to get there.

Kirk


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