Tsunami, the Second Wave:
Prepare your portfolio for the next tidal wave
By Keith Springer
We are living in extraordinary times. The
demographics of the aging baby boomer generation and the massive
government interventions have changed the rules for investing. Over
the next several years we will be gyrating back and forth between
the different economic cycles of deflation, inflation, re-flation
and stagflation, and each will require an entirely different
What’s next? Deflation! Deflation
is brought about by a systemic slowdown of an economy that brings
prices "lower" for goods and services. That is practically unheard
of in a capitalist economy, except at the end of a generational
cycle every 40
years or so, such as we are currently experiencing with aging Baby
Boomers. The situation is exacerbated by excessive leverage, which
is essentially too many people (and governments) with too much debt.
The process of resolving this excess is called “deleveraging”, the
massive elimination of credit and debt throughout the economy.
Deleveraging by design is “deflationary”, which is bad news for
The scary part of a deflationary investment
environment is that it is completely foreign to today's investors.
Very few are familiar with what is necessary to be successful during
a deflationary period, and most will be caught dangerously short and
lose their life savings.
The primary cause for deflation is the
demographics of the aging Baby Boomers. Demographics tell us that:
do very predictable things at different times in their lives,
with peak spending occurring at approximately 48 years of age
The populations of the U.S. and the developed world are aging
As people age, they naturally spend less, generating less
demand for goods and services.
Less demand leads to decreased supply, a.k.a. production; less
supply means fewer people are needed in the workforce.
The deflationary spiral continues until a generation comes
along that is big enough to fill the shoes of the Baby Boomers.
That generation is the Echo-boomers, the children of the Baby
Boomers, who will not reach their peak spending years until
The massive deleveraging process that the
world is currently going through is undeniable.
Banks are expected to cut an additional $1.5+ trillion worth of
States are set to lay off one million to two million more
people this year.
The new European austerity programs, ones which we will have
to adopt as well (and soon!), will reduce consumption and
perpetuate the deflationary spiral.
Inflation continues to be subdued despite the massive
government spate of monetary printing presses in overdrive.
Overall, more than $10 trillion of consumer and $20 trillion
of corporate credit will vanish.
Given the tremendous amount of borrowing and spending by world
governments, many people feel that inflation is inevitable. It is
true that the government is printing and spending like mad, trying
its hardest to create inflation. However, what is essential for
investors to understand is that the government’s attempts simply
cannot create assets as fast as they are being destroyed. That’s
deflationary, not inflationary. Eventually they will succeed which
will be a concern down the road, but be not for while.
This is a very dangerous period, and investors must employ a
"tactical" investment approach, as the old fashion buy-and-hold
(buy-and-hope) approach will again prove disastrous. For instance:
bonds and cash would be decimated by inflation, but may be very
profitable during deflation. On the other hand, a portfolio of
stocks and commodities would do well during inflation, but
catastrophic during deflation. And of course, there will be a time
in the near future where you will want to be in cash, so you must
have an exit strategy.
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