I know most of you know about the Super Bowl market predictor. Basically, if an old AFL team wins the Super Bowl, the stock market falls. If an old NFL team wins, that's good for the stock market. I don't really want to get into that even if it's been like 80% accurate. What I know is that there are multiple reasons that the stock market should continue to correct despite the potentially soothing sounds of Janet Yellen this Wednesday and Thursday. 

While Cam Newton might have a hard time understanding what happens when everybody on his team doesn't play well - including himself - the markets sure are starting to understand what happens when the world economy grows at a slower pace. Back in January I wrote an article for MarketWatch titled Markets Are Adjusting to "Slow Growth Forever"  that described exactly what is going on in global markets. Here's the short of it:

  • Demographics do not support as high a level of long-term global growth as we had from the late 1940s to early 2000s. The new level of average global growth will be about 2% for a very long time vs the about 4% that we had before. This is the "slow growth forever" that I am talking about.
  • Governments around the world took on debt with the unrealistic idea that growth would actually be over 4%. Maybe they knew that's what they were doing, maybe it's not, but the end result is that most nations have a lot of debt they can't pay for out of tax receipts and other cash flows. This will absolutely be a headwind to the global economy and ultimately lead to even more currency devaluations.

Global Debt

 

As you can see from the chart above, since 2007, while household and financial debt have decreased as a percentage of total global debt, both have still dramatically increased. Financial firm debt rose from $37 trillion to $45 trillion, almost an 18% increase. Household debt has increased 23%. Those aren't even the bad category. Government debt is up a whopping $25 trillion and counting (those stats are over a year old) - that's over 75% increased government debt. 

The government debt is very worth considering. Most people consider it the wrong way though. Most people I come across believe that we are doomed to an economic collapse and depression. That's not likely. What is likely is that central banks do what they always do and print more money. The thing with printing more money, is that it doesn't really lead to growth in the economy, it only eventually creates inflation once the deflationary forces are outweighed with new money. This is what gold bugs expect to happen. I do too. Just not for a while yet.

Ultimately economic growth is determined by personal consumption and no amount of helicopter money can create more aggregate demand other than for short periods of liquidity tightness. What we are seeing develop now is not a liquidity crisis. There is idle cash laying around all over the world. What we are seeing is a realization that aggregate demand has very little room to improve. 

Why will aggregate demand not improve as fast in the future as it has in the past. Simply put, there are not and will not be as many more new people in their peak spending years (family raising years) as a percentage of total population. That is, the growth rate of the middle income population is slowing.

The populations of Japan, China and Europe are all very old and getting older. Japan is so old - "how old are are they?"  Japan is so old that I believe that is where the next crisis begins. Again, not for years yet, but eventually. And that is if nothing bad happens in China or Europe in the meantime, which is I suppose no better than a coin flip that is dependent on whether central bankers are reactive or proactive.

The U.S. is actually only getting moderately older due to the huge millennial generation - hey, the boomers at least planned ahead for something by procreating a generation to take care of them - so the U.S. has a chance to plod along much better than most of the world. By focusing on the handful of actual growth sectors, investing in the U.S. will continue to be a core holding for decades. There are also several nations with good resource positions, lower debt, younger populations and reasonable rule of law to invest in. We'll be covering some of those places over the course of the next several months. 

What the markets are reflecting now, as they continue to approach bear market territory, is an appropriate correction for the reality of slower growth. Lower valuations make sense going forward now that we know that revenues will grow slower and earnings will likely pull back a bit short run. That doesn't mean there won't be money to be made in markets. It'll just be made differently than in the past. 

As an investor, you must accept that typical asset allocation (modern portfolio theory = the worst kind of chart puke) will never work again because it is based on an backward looking era of perpetual high growth. That perpetual high growth is no longer the case. We must adjust to the biggest trends in the global economy. I will have a special report out soon.

Kirk

 


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