3 Questions From the July Webinar About the 2030s Depression

On Track for a Depression

The updated analysis confirms that the global economy is on track for a prolonged decline in the early 2030s that will constitute an economic depression. The following trends are causal to why we will endure what we estimate will be six years of general economic decline:

1. Demographics
2. Health Care Costs
3. Entitlements
4. Inflation
5. National Debt

The US is the world’s dominant economy, followed by China as #2. Both economies are going to have difficulties avoiding a prolonged contraction within about seven years. Europe will, also, for the same reasons listed above. However, within Europe, there will be some notable differences in magnitude of decline.

Nothing is inevitable in economics, but we view the projected outcome in the 2030s as most probable. The five factors listed above are intertwined, cultural, political, and biological, and they are not likely to change in a period as short as seven years.

The best that we all can do is be forewarned and therefore forearmed. There are definite steps to take to protect our businesses, families, and legacy. We discussed numerous angles to accomplish this during our July 27 webinar. However, it is inevitable that smart people think of different perspectives and have questions. The questions answered in this blog pertain to:

1. Personal Finance
2. International
3. Stock Market

Personal Finance

“My question is about the individual. The one who, while the individual has investments, does not have a few million put away, who has a mortgage, who is in their late 50s, where a stock market decline would wipe them out at this time in their life, and where this will all be happening right when retirement is supposed to start. What advice would you give them?“

These questions are always difficult to answer because there are so many other variables to consider. Health, field of endeavor, size of mortgage, children in college or empty nester, and more all come into play.

Apologies to the person asking the question if the answer is too vague. We will tackle the thought of “where a stock market decline would wipe them out” first. That need not be the outcome for you amid a stock market decline. Talk to your financial advisor to determine if any of the following come into play.

1. Is your portfolio at least keeping up with the overall market (in other words, is your wealth growing as best as can be expected)?
2. If you are in ETFs or individual stocks, will your financial advisor set up trailing stop loss orders for you?
3. Do your investments adequately reflect your risk profile?

Regarding the rest of your question, it is about living below your means as aggressively as you can for the next seven years to save as much money as you can, carrying as little debt as you can into the 2030s, and, if that doesn’t get you safe, perhaps delaying retirement if you are healthy enough. Matching your risk profile to the goal of wealth accumulation while rebalancing toward savings is not sexy, but the trajectory could be enough.

International

This question concerns the future of the US dollar (USD) as the dominant world reserve currency: “Businesses in Argentina, for example, are using the yuan as their preferred purchasing currency for importing due to the inflation crisis there and continued descent of the Argentine peso. Could we see more Latin American countries or other countries whose currency is losing value against the USD do this?”

Depending on the source used, Argentina’s economy is ranked between 0.5% and 0.8% of global GDP. As such, it is not ranked in the top 20 economies on the planet. Imports as a percentage of domestic GDP are estimated at 15.3%. The move by Argentina per se is not threatening.

It is easy to understand why Argentina would shift in the direction of the yuan given the country’s ongoing problems with inflation. It also appears to be a function of Argentina’s desire to hold on to its reserves. Note that, so far, the yuan is being used only in trade with China. Argentina is reportedly weighing paying off debts with the yuan. It would be interesting to see what that would do to interest rates for future loans to Argentina. 

The question also asks if we could see other Latin American countries, or other countries losing value against the USD, follow suit. The answer is yes. Bolivia just signed on with the Chinese currency. We see it as a byproduct of the Fed’s policies since COVID. How far the Fed will let the trend go is an open question. An aspect of their mandate is to manage the value of the USD for the long-term benefit of the US.

Stock Market

“If you're forecasting a stock market correction in October, would it be wise to convert from mutual funds that are mid-to-heavy into stocks over to a money market fund? When does your forecast show moving back into equities will make sense?”

Point of clarification: we do not know when the correction will start. It could be September, or October, or November, plus or minus a couple of months. We do not try to time the market. Our experience is that it is not possible to do so over an extended period.

You are correct in that our analysis suggests that a correction while we are on the downside of this business cycle is probable. Right now, it looks like it will be sharp and short-lived. Unless you are on the cusp of retiring and unable to tolerate any risk, think about the following:

1. Has your financial planner indicated that your mutual funds should hold up well even during a correction?
2. How correlated are your mutual funds to the equity markets?
3. Does your financial planner suggest that you are young enough that you can take the hit and be upside-right in a brief period?

Regarding going into CASH, via a money market fund, it is not our preferred approach unless it is only for a brief period and you are getting a return on the money at least equal to inflation. We do not want you to miss the next upside move in the market.

Conclusion 

1. The 2030s economic depression is coming, and we need to prepare.
2. The ripple effect of monetary policy stemming from COVID is placing stressors on the USD and the global economy.
3. Ask your financial partner the relevant questions cited above so that she or he can work with you to provide shelter from the storms while growing your wealth consistent with the risks you are willing to take.

Continue to follow us as we update the analysis and answer more questions in the weeks to come. Watch the webinar on the 2030s if you have not already. Please reach out to itr@itreconomics.com with any questions you may have.