Problems on the Horizon – Or Opportunity?

A week ago fixed-income guru Bill Gross and Fed Chief Janet Yellen took turns bashing the U.S. stock market, suggesting that it has become overvalued with little room for additional appreciation in the near term. This week it was Stanley Druckenmiller’s turn to wax pessimistic, opining that America’s enormous “baby boomer” generation could end up bankrupting their children in the future, pulling the stock market down along with it.

If you don’t know who Druckenmiller is, that’s okay since he shuns the limelight despite his reputation as one of the most astute investors in the world. He has rightfully earned the reverence of Wall Street, having earned a large fortune working alongside multi-billionaire George Soros on a number of prescient macroeconomic bets that paid off huge. So when he says our economy will be presented with a “massive, massive problem” fifteen years from now we should all take note.

Anyone familiar with the work of Harry Dent on “spending wave theory” won’t be at all surprised by Druckenmiller’s concern. It was Dent who first predicted the fall of the Japanese stock market in the 1980s before it became apparent to everyone else, and it was also Dent who predicted in the early 1990s that the Dow Jones Industrial Average would soon reach 10,000 when that figure seemed preposterous.

Notably, Dent made his far-sighted forecast for the slowdown of the Japanese economy based on the timing of when its population aged 45 – 50 would peak (1990 – 1994), and he made a similar prediction that identified 2009 as the peak year for the U.S. economy. That call looked pretty good in 2008 while the stock market was crashing, but the strong stock market rally in the intervening years has called into question the accuracy of that prediction.

The fact that the engine of economic activity may eventually shift to another part of the globe should come as no surprise to anyone. If the history of the world has taught us nothing else, the rise of new technologies combined with the socio-economic disruptions they create invariably shift economic activity to the people best positioned to capitalize on them. Just as Egypt, Mesopotamia, and Europe took turns dominating global commerce in the past, eventually the baton will be handed off from North America to who knows where in the future.

In the current issue of Personal Finance I note that more than one billion people will ascend to the middle class in China and India within the next ten years, dwarfing the total population of the United States at that time. That doesn’t necessarily mean that the center of the economic world will immediately migrate from here to there, but it does portend a radical shift in the global distribution of economic wealth.

From a personal perspective I’m not too worried about Druckenmiller’s forecast as 15 years from now I will be 71 and (presumably) retired, with little opportunity to alter my standard of living. But I do worry for my children who are in their early 20s and will pushing 40 at that time, midway through their careers and perhaps saddled with the economic burden of raising a family.

Coincidentally, a few days ago my daughter asked me to help her decide how to invest her newly opened Roth IRA. One year removed from college graduation, she is gainfully employed and wants to begin putting aside money for her eventual retirement. So we had a long talk about how the global economy may evolve in the decades to come, and where the biggest opportunities for investment gains might be.

When I started thinking about how I would invest my retirement account if I had 40 years until retirement instead of 10, I discovered I started thinking more like Harry Dent and Stanley Druckenmiller and less like the certified financial planner I am. There is no textbook formula that can tell us what the fair value of a business is today for what it might be doing several decades from now, but we do know what the rewards can be when we correctly identify the long term winners.

Just as Apple stock could have been bought for just 1% of its present value only twenty years ago, similar fortunes will be made twenty years hence by far-sighted investors with keen foresight and a high tolerance for risk. I don’t pretend to know exactly where to find them, but I do know they are out there waiting to be discovered.