My mind wandered to the ’70s astrology craze recently and brought back memories of sun signs, moon signs, rising signs and all the dogma that described personalities and predicted compatibility among people based on their astrological charts. I was in good company back then, as Nancy Reagan was said to use a famous San Francisco astrologer for advice while she filled her role as the power behind the throne during her husband’s political career.
These days, my generation has replaced astrologers with economists. Back when we were broke, all that mattered was that someone we’d just met was of a compatible sign -- as in, “What’s your sign? Far out!” Today, most of us have at least some money to be concerned about, so economists have replaced astrologers in our effort to gain a glimpse of the future.
Back in August, I wrote about Mohamed El-Erian, who described the Federal Reserve’s effort to create cash in the economy as “The Only Game in Town” -- which was the title of his book. El-Erian was the CEO of PIMCO, the bond mutual fund powerhouse, and later the director of Harvard’s endowment fund.
His book left us hanging with the thought that we are in uncharted territory thanks to the Federal Reserve’s actions to fill the void left by a dysfunctional government and a business community hoarding cash while it made record profits. El-Erian writes that at some unspecified point we will find ourselves at a fork in the road leading to either continued prosperity or a new Great Depression. His unsatisfying conclusion amounts to a Yogi Berra-ism -- “When you reach the fork in the road, take it.”
The answer to that conundrum may lie in another book, “Prosperity in the Age of Decline” by Alan and Brian Beaulieu. These twin brothers have operated an economic prediction service called the Institute of Trend Research for more than 35 years and have enjoyed a 95 percent success rate for predicting economic future events.
In their minds, we will continue to have relative prosperity, with some healthy corrections in the economy periodically over the next 13 to 16 years. Then, in or about 2030, our prosperity (and massive debt) will catch up to us, leading to substantial levels of inflation that will be difficult to control.
Inflation becomes a vicious cycle that feeds upon itself, and those of us who remember our astrological sign also recall when inflation in this country hit the high teens for a few years back in the early ’80s. The Fed stepped in and raised the interest rate in an effort to deliberately create a recession and bring the upward price spiral to an end. It worked.
For investors, the way to capitalize on the future’s inevitable inflation is to invest, in the meantime, in assets that keep pace with inflation, such as equities (stocks) and real estate. Apart from these core holdings would be the need for bonds for those in or close to retirement. But in an inflationary environment, bonds need to be purchased individually -- so they can be held to maturity -- or purchased through mutual funds whose holdings are relatively short term, averaging two to four years.
The goal for normal people is to be debt-free, or close to it, by the time 2030 rolls around. Remember that our government is nothing more than a giant insurance company that happens to have a military -- both of which are expensive. The underlying causes of a great depression will be the need for the government to raise taxes and/or borrow a lot more money. Neither of these options will be good for business, which will lead to an economic slowdown.
Meanwhile, the man on the street dealing with a resetting adjustable rate mortgage will be competing with government and private institutions whose thirst for loan proceeds will be the driving force behind rising interest rates.
No single event will lead to what some would consider a doomsday scene. Thanks to economic resilience, it takes about three or four of the major drivers occurring at once to create a perfect storm. In the meantime, we have time to get our houses in order by, for example, upping the amount we save and invest, switching to 15-year fixed mortgages and generally battening down the hatches.
Asking my trusty Magic Eight Ball when the market might signal a turn, the answer coming up in that little window was “Try Again Later.”